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Advantages and Disadvantages of taxation system

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Advantages and Disadvantages of taxation system

  1. 1. Advantages and Disadvantages of Taxation System advantages and disadvantages of tax system 1
  2. 2. What is taxation system? A world taxation system is a proposed system for the collection of taxes by a central revenue service. Taxation is a tool commonly used by government as a means of redistributing income amongst its citizens. In some instances, taxation can have a positive effect on the redistribution of income, other times, it can do more harm than good. In its sense taxation system has two types narrated next. advantages and disadvantages of tax system 2
  3. 3. Types of taxation: Direct tax:  Direct Taxes are the taxes that are levied on the income of individuals or organizations. They include Income tax, corporate tax, wealth tax and inheritance tax. Indirect tax:  An indirect tax is levied on goods or services, which increases the price of a good or services. The tax is actually paid by the end consumer, by way of a higher retail price. They include tax on cosmetics and other goods of daily use. advantages and disadvantages of tax system 3
  4. 4. Direct taxation: Advantages Disadvantages  control inflation, Through increasing of various taxation rate, taxation can be used as the means of controlling inflation especially the demand pull inflation. Since raising of taxation rate of various commodity result into decrease in purchasing power of individual person hence being a solution to demand pull inflation.  Reduce purchasing power, Taxation especially when the tax rate are high has the tendency of reducing the disposable income of an individual which subsequently reduce the purchasing power. advantages and disadvantages of tax system 4
  5. 5. Cont .. Advantages Disadvantages  Discourage saving, Since taxation rate reduce the disposable income of an individual, this means an individual saving ability will be reduced. Hence from, this money can not remain in just few hands and it remains revolving.  Discourage investment, Heavy tax rate on firm profit become disincentive for investor to invest on particular sector instead investors will opt to invest in other sector which their tax rate is of reasonable value. advantages and disadvantages of tax system 5
  6. 6. Cont .. Advantages: Disadvantages:  Redistribution of income, Through taxation system especially the progression tax system taxation can be a means of ensuring fair distribution of income between individuals by imposing high tax rate for those who earn more and less tax rate for individual who has lower income, this also can lead to reduction of income gap between poor and rich people.  The another disadvantages of a direct tax is that it is liable to be evaded. By submitting false returns, many people try to evade income tax. Unless the civic sense of the people is well — developed and there is spread of education among them, the administration of direct taxes is very difficult. advantages and disadvantages of tax system 6
  7. 7. Cont .. Advantages: Disadvantages:  When the people are fully aware of the payment of taxes, they are also conscious of the way the government spends the money. They resent unproductive or wasteful expenditure. As a result, the government becomes careful in its expenditure.  People’s Indifference: When a man directly bears the burden of a tax, he tries to know how the government spends that money. Those who are not directly affected by the burden of taxation remain indifferent as to the way the public expenditure is incurred. advantages and disadvantages of tax system 7
  8. 8. Cont .. Advantages: Disadvantages:  Direct taxes constitute an important source of government revenue. Their collection charges are also low. Therefore, direct taxes are productive.  Since not everybody has to pay direct taxes, it is often responsible for creating social conflict amongst societies. It also leads to crimes, social injustice and a sense of inferiority among different groups of people. advantages and disadvantages of tax system 8
  9. 9. Cont .. Advantages: Disadvantages:  Paying the right amount of business taxes provides good credit rating to financial institutions and agencies. You can use your good credit rating when getting a loan for additional funds for the expansion of your business or other purposes.  Taxation can increase the expenses that businesses face, which makes it more difficult for them to achieve profitability. Businesses pay numerous taxes, such as payroll taxes on employee wages, property taxes, business taxes and fees for permits and licenses. Business-related taxes leave less money for expanding businesses through investment and hiring. High business taxes may encourage outsourcing of operations abroad. advantages and disadvantages of tax system 9
  10. 10. Cont .. Advantages: Disadvantages:  Direct tax enhances the consciousness of the citizens. Taxpayers feel burden of tax and so they can insist the government to spend their contributions for the welfare of the community.  Direct tax gives mental pinch to the taxpayers as they have to curtail their income to pay to the government. advantages and disadvantages of tax system 10
  11. 11. Cont .. Advantages: Disadvantages:  Taxation helps greatly in the redistribution of income as it gives the government funds which they can use to fund public services.  The main problem of using taxation to redistribute income is the possibility of ridiculously high effective tax rates. Though one might think that high effective tax rates would equate to more tax revenue, a high tax rate would give citizens a disincentive to work. advantages and disadvantages of tax system 11
  12. 12. Indirect taxes: Advantages Disadvantages  The Poor Can Contribute: They are the only means of reaching the poor. It is a sound principle that every, individual should pay something, however little, to the State. The poor are always exempted from paying direct taxes. They can be reached only through indirect taxation.  Regressive: Indirect taxes are not equitable. For instance, salt tax in India fell more heavily on the poor than on the rich, as it had to be paid at the same rate by all. Whether a rich man buys a commodity or a poor man, the price in the market is the same for all. The tax is wrapped in the price. Hence, rich and poor pay the same amount, which is obviously unfair. They are thus; regressive.advantages and disadvantages of tax system 12
  13. 13. Cont .. Advantages Disadvantages  They are convenient to both the tax-prayer and the State. I he tax-payers do not feel the burden much partly because an indirect tax is paid in small amounts and partly because it is paid only when making purchases.  Uncertain: Unless indirect taxes are imposed on necessaries, we cannot be sure of the revenue yield. In the case of goods, with an elastic demand, the tax might not bring in much revenue. The tax will raise the price and contract the demand. When the thing is not purchased, the question of the tax payment does not arise. advantages and disadvantages of tax system 13
  14. 14. Cont .. Advantages: Disadvantages:  By imposing custom duties on imported products the govt. is taking part in encouraging the domestic industries and its products.  Through heavy custom duties thing needed for the production of goods in domestic industries will not be prepared with changing demand of customers. advantages and disadvantages of tax system 14
  15. 15. Cont .. Advantages: Disadvantages:  Through higher anti dumping duty the central govt. discourages the exporters to export the domestic goods in less price.  Through anti dumping duties, Goods produced in plenty in our country can not be exported and hence these goods becomes unusable and provides no benefits to the traders. advantages and disadvantages of tax system 15
  16. 16. Cont .. Advantages Disadvantages  Broad-based: Indirect taxes can be spread over a wide range. So they are more beneficial and suitable.  Easy Collection: Collection takes place automatically when goods are bought and sold. A dealer collects the tax when he charges a price. He is an honorary tax collector.  Raising Prices Unduly: They cause the price of an article to rise more than the tax.  The cost of collection is quite heavy. Every source o production has to be guarded. Large administrative staff is required to administer such taxes. advantages and disadvantages of tax system 16
  17. 17. Cont .. Advantages Disadvantages  They are very elastic in yield, imposed on necessaries of life which have an inelastic demand. Indirect taxes on necessaries yield a large revenue, because people must buy these things.  They discourage industries if raw materials are taxed. This will raise the cost of production and impair their competitive capacity. advantages and disadvantages of tax system 17
  18. 18. Cont .. Advantages Disadvantages  Discourage use of harmful products, As there are many harmful products which are produced in various country but the manufacture of such products may at the same time being a good tax payer, The government may not decide to shutdown such companies instead the government will impose high tax upon such commodity to discourage users from consumption of such commodity, example cigarette and spirits.  No Civic Consciousness: These taxes do not develop civic consciousness, because many times the tax-payer does not even know that he is paying tax. The tax is concealed in the price. advantages and disadvantages of tax system 18