Merits of Direct Taxes:
(i) Equity:
1. Direct taxes are progressive i.e. rate of tax varies according to tax base.
2. For example, income tax satisfies the canon of equity.
(ii) Certainty:
1. Canon of certainty can be ensured by direct taxes.
2. For example, an income tax payer knows when and at what rate he has to pay income tax. (Hi) Elasticity:
3. Direct taxes also satisfy the canon of elasticity.
4. Income tax is income elastic in nature.
5. As income level increases, the tax revenue to the Government also increases automatically. (iv) Economy:
6. The cost of collection of direct taxes is relatively low. 7. The tax payers pay the tax directly to the state.
Demerits of Direct Taxes:
(i) Unpopular:
1. Direct taxes are generally unpopular.
2. It is inconvenient and less flexible.
(ii) Productivity affected:
1. According to many economists direct tax may adversely affect productivity.
2. Citizens are not willing to earn more income because in that case they have to pay more taxes.
(iii) Inconvenient: The tax payers find it inconvenient to maintain accounts, submit returns and pay tax in lump sum.
(iv) Tax Evasion:
1. The burden of direct tax is so heavy that tax-payers always try to evade taxes.
2. This ultimately leads to the generation of black money, which is harmful to the economy.
