Direct taxes are paid directly to the government by taxpayers based on their income or assets. Indirect taxes are ultimately paid by consumers through higher prices of goods and services. Direct taxes are generally progressive, where higher incomes face higher tax rates, while indirect taxes are often regressive with the same tax rates regardless of income. Both direct and indirect taxes have advantages and disadvantages related to issues like tax evasion, prices, revenues, and economic impacts.

2. DIRECT TAXES INDIRECT TAXES
Direct taxes are paid entirely by a
taxpayer directly to the government
Indirect tax is ultimately paid for by
the end-consumer of goods and
services.
Burden of taxes cannot be shifted Burden of taxes can be shifted
It can help reduce inflation It enhances inflation
Tax evasion can be possible
These cannot be evaded as are
charged on goods and services
Higher administrative costs are
involved
Lesser administrative cost involved
Direct tax is progressive Indirect tax is regressive
After the income for a year is
earned or valuation of assets is
determined on the valuation date.
At the time of sale or purchases or
rendering of services

4. Advantages of direct tax Disadvantages of indirect tax
Direct taxes are ‘progressive’, as
they depend on paying capacity.
•Rich person is taxed more compared
to poor person
Indirect taxes are termed as
‘regressive
•Indirect taxes do not depend on
paying capacity.
Since the indirect tax is uniform, the
tax payable on commodity is same,
whether it is purchased by a poor
man or a rich person.
•This argument is only partially
correct; as it is possible to levy lower
taxes on goods of daily consumption
while levying higher taxes on luxury
goods and the regressive effect can
be reduced in many circumstances

5. Advantages of direct tax Disadvantage of indirect tax
Direct taxes do not affect prices of
goods and service.
Tax on goods and services increases
its prices, which reduces demand of
goods and services. Lesser demand
means lower growth of
industrialization.

6. Advantages of direct tax Disadvantage of indirect tax
Low income tax rates decrease tax
revenues and tax evasion and
hawala transactions.
High customs/ excise duty increases
smuggling, hawala trade and mafia
gangs, which is harmful in many
ways. Similarly, high excise duty
leads to evasion.
Direct taxes do not increase the
cost of modern machinery and
technology.
Higher customs duty and excise
duty increases cost of modern
machinery and technology.
Direct taxes are not inflationary. Indirect taxes increase the prices of
products and hence are often
perceived as inflationary.

8. Disadvantages of direct tax Advantages of indirect tax
It is psychologically very difficult for a
person to pay some amount after it is
received in his hands. Hence, there is
psychological resistance .
•[This is the reason why even Income Tax
Act is widening the scope of “Tax
Deduction at Source’’ (TDS) and TCS.
Thus, a direct tax is converted to an
indirect tax].
Since the price of commodity or service is
already inclusive of indirect taxes, the
customer i.e. the ultimate tax payer does
not feel a direct pinch while paying
indirect taxes and hence, resistance to
indirect taxes is much less compared to
resistance to direct taxes.
•Manufacturer’s/ Dealer’s Psychology
favours indirect taxes- The
manufacturer/ trader
who collects the taxes in his Invoice and
pays it to Government, has a
psychological feeling that he is only
collecting the taxes and is not paying out
of his own pocket

9. Disadvantages of direct tax Advantages of indirect tax
Tax evasion is comparatively more in
direct taxes where it is on
unorganized sector, since control is
difficult.
Tax evasion is comparatively less in
indirect taxes in organized sector due
to convenience of control.
Collection cost of direct taxes as
percentage of tax collected are
higher in direct taxes compared to
indirect taxes.
Collection costs of indirect taxes as
percentage of tax collected are lower
in indirect taxes compared to direct
taxes.
Direct taxes can control wasteful
expenditure only indirectly by taxing
higher income group people.
Government can levy higher taxes on
luxury goods, which reduces the
wasteful expenditure.
Government can judiciously use the
direct taxes to support development
in desirable areas, while discouraging
in backward areas, infrastructure
development etc.
Government can judiciously use the
indirect taxes to support
development in desirable areas, while
encouraging it in backward areas
also, e.g. reducing taxes on goods
manufactured in tiny or small scale
units; lowering taxes in backward
areas etc.

10.  On the basis of degree of progression of tax,
it may be classified into:
 Proportional tax
 Progressive tax
 Regressive tax
 Degressive tax

11.  Proportional tax
 A tax is called proportional when the rate of taxation
remains constant as the income of the tax payer
increases. In this system all incomes are taxed at a
single uniform rate, irrespective of whether tax
payer’s income is high or low. The tax liability
increases in absolute terms, but the proportion of
income taxed remains the same.
 Progressive tax
 When the rate of taxation increases as the tax
payer’s income increases, it is called a progressive
tax. In this system, the rate of tax goes on increasing
with every increase in income.

12.  Regressive taxation
 A regressive tax is one in which the rate of taxation
decreases as the tax payer’s income increases. Lower
income is taxed at a higher rate, whereas higher
income is taxed at a lower rate. However absolute tax
liability may increase.
 Degressive taxation
 A tax is called degressive when the rate of progression
in taxation does not increase in the same proportion
as the increase in income. In this case, the rate of tax
increases upto a certain limit, after that a uniform
rate is charged. Thus degressive tax is a combination
of progressive and proportional taxation. This type of
taxation is often used in case of income tax. This is
the case of income tax in India as well.