Question

Advantage and disadvantage of direct tax in a table.

Answer 1

Explanation:

Advantages of direct tax:-

• Direct taxes are easy to collect. For example, direct taxes collected through the Pay As You Earn (PAYE) scheme are not difficult to collect. All the employer does is to deduct a certain percentage of money from his employee’s pay every month and pay it directly to the government. This significantly reduces the cost of collecting tax. It of course also makes it very easy to collect.

• Tax evasion is very difficult here. With direct taxes, it is very difficult for people to evade tax or avoid paying tax unlike in an indirect tax where a person can evade it by just deciding not to consume items or products that are taxed.

• Direct taxes make it easier for tax authorities to predict how much revenue they will be able to make and this is very important when it comes to proper planning. Authorities are able to predict correctly how much revenue they will make since they already known the number of individuals and companies that are going to be taxed and how much they shall be taxed.

• Direct taxes are helpful to the tax payer in terms of getting himself prepared and for planning. This is possible simply because he knows in advance how much he is going to pay as tax and when he will pay the tax. He can therefore use this relevant information in making his plans for the future.

Disadvantages of direct tax:-

• One of the biggest disadvantages of direct taxes – especially high direct taxes is the fact that it has the tendency to discourage people from working hard. How does direct tax cause a disincentive to work hard? This is simply because of the progressive nature of the direct tax which sees people who earn more money paying more in tax. This therefore discourages some people from working hard to make above certain levels of income because they know that higher incomes are going to be subjected to heavy taxes. This is considered the biggest disadvantage of direct taxes.

• Another disadvantage of direct taxes is the fact that it can discourage investment. Direct taxes such as corporation tax or profit tax, if they are too high can discourage people from investing in businesses since they know that a lot of the profits they shall make will go into taxes.

• Direct taxes also reduce the capital available for companies to re-invest in their companies. A good example of such a direct tax is corporation or company tax. Company tax is any tax that is levied on the profit of a company. When company taxes are too high, companies or firms end up paying a huge chunk of the profits that they make as tax. This leaves them with very little money for re-investing. This therefore affects the expansion of the business and makes them unable to produce more goods. In the long run this negatively affects the national income.

• Direct taxes can be very annoying to pay. The reason direct taxes make the tax payers unwilling to pay them is because they are well aware of the fact that they are being taxed. But this isn’t the case in the indirect tax where the tax payer is not even aware that he or she is paying it and therefore doesn’t have any grudges when making the payment.

• Direct taxes can also lead to tax evasion. The reason tax evasion is synonymous with direct taxation is because people can manipulate the laws. Accountants and experts with negative minds can easily doctor certain figures (profits, income, etc) in order to reduce the tax rate imposed or in order to avoid paying the tax all together. People can submit fake return of income and avoid paying taxes.