Indirect Taxes and disadvantages

What is indirect tax ?

Definition: An Indirect Tax is a tax which is collected from an intermediary/supplier who subsequently shifts the burden of the tax to the consumers as it is included in the prices of the goods/services sold. Indirect taxes are to be borne by the end consumers as burden of payment shifts towards them.

Examples of Indirect Taxes

Examples:Indirect tax is levied in the form of excise duties, customs duties and value- added taxes (Sales tax).

What are the disadvantages of Indirect Taxes? 

disadvantages of indirect taxes

The disadvantages of Indirect Taxes are:

  • Indirect tax lead to inflationary pressures as the incidence of the taxes are passed on the consumers in the form of higher prices.
  • Indirect taxes are of a regressive nature because the impact of these taxes are more severe on the poorer segments of the society than on the rich persons as a uniform rate of tax is applicable on a product/service to all sections of society.
  • Indirect taxes are uncertain as it is not always possible to anticipate the repercussions of the tax imposed on a particular commodity/product.
  • Indirect taxes can be evaded on a large scale by even a few collecting agents or intermediaries, resulting in substantial losses to the government.
  • Indirect taxes are uneconomical to collect as several intermediaries are involved in the collection of taxes and the process involves a very large number of transactions and close monitoring of the activities.
  • Indirect taxes do not promote civic consciousness among the taxpayers because the individuals do not feel the burden of the taxes as the taxes are in-built in the prices of the products purchased.

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