1. Define direct tax. Give two examples. 2. State how a direct tax can foster social consciousness.

Question

Read the following extract and answer the questions that follow: 

Economic Times, September 4th, 2012

Terming payment of taxes as a ‘mark of civilisation’, Finance Minister P. Chidambaram has assured that authorities will not “rashly” implement controversial retrospective tax rules while once again promising a non-adversarial tax regime for all taxpayers. It is the second time in less than a week that Chidambaram has given assurance of a stable and fair tax regime, after the tax department attracted criticism for ushering in what some have called a “raid raj” and for introducing a series of measures industry and investors have slammed as retrograde.

1. Define direct tax. Give two examples.

2. State how a direct tax can foster social consciousness. 

3. What is meant by a progressive direct tax? How does its imposition bring about equity? 

4. State two demerits of direct tax.

Answer 1

Case Study:

1. The tax paid by the person on whom it is legally imposed is called direct tax. In other words, Taxes imposed on receipt of income are called direct taxes. 

Example: 

1. Income Tax. 

2. Capital Gain Tax.

2. Direct tax can foster social consciousness as person knows that he is paying a tax he feels conscious towards his rights. He claims the right to know how the government uses his money. Civic sense is thus developed. He behaves as a responsible citizen.

3. Taxes in which the rate of tax increases, with the increase in tax base are called progressive direct taxes.

Progressive tax: A tax is called progressive when the rate of taxation increases as the tax payer’s income increases.

Exaniple: 

Income tax. A direct tax is equitable in the sense that it is levied according to the taxable capacity of the people. The rate of direct taxes, like the income tax, can be fixed in such a way that the higher the income of a person, the greater is the tax rate.

4. Two demerits of direct tax:

1. Inconvenient: The greatest drawbacks of direct taxes is that they put the taxpayer to a lot of botheration and inconvenience. Sometimes, the taxpayer is called to pay the entire tax in one installment. 

2. Evadable: By submitting false return of income, some people evade the tax. That is why a direct tax is called as ‘A Tax on Honesty’.