Demerits of direct tax

Business studies study module
  • Encourage avoidance and evasion; whenever possible people come up with ways of reducing the amount of tax payable falsifying information or just ignoring payment.
  • Discriminatory /not imposed on all citizens; direct taxes are not paid all citizens as low income earners who do not fall within the tax brackets are exempted
  • Discourage investment/deterrent to investment; Heavy taxation on profits discourage people from investing in risky but profitable businesses
  • Discourage work/deterrent to work; High rate of direct tax may deter people from working harder as people may opt for leasure instead of working extra time.
  • Encourage capital flight; high taxes such as corporate tax make foreigners to withdraw their investments and transfer them to countries with lower taxes.
  • Unpopularity; the burden of the tax (incidence and impact) of tax is borne the tax payer directly and at once. This makes direct taxes very unpopular.
  • May inconvenience the tax payer; the tax payer has to comply with complicated formalities relating to sources of income as well as the expenses incurred while generating it. This may force the tax-payer to engage the services of tax experts who have to be paid.
  • Lack of civic awareness; on tax payers are not interested in scrutinizing government expenditure as they do not feel the pinch of paying tax.

Indirect tax

These are taxes in which the impact is on one person and the incidence is partially or wholly on another person. The tax payer may shift either the whole or part of the tax burden to another person.

Such taxes are usually based on the expenditure on goods and services and include the following:

  1. Sales tax: this is based on the sales made and may be assessed either as a percentage of the sales or a fixed amount e.g. sh.2 per every kilograms sold. The tax may be collected at one point or various points of sale. In Kenya, sales tax has been replaced V.A.T
  2. VALUE ADDED TAX (V.A.T): this is the tax that is levied on the value that a business adds borne the consumer in the final price.
  • Export duty: this is a type of tax that is levied on exports. The objective may either to raise revenue or discourage the exploitation of some commodities.
  1. Import duty: This is tax levied on imported products,

For the following reasons.

  • Raising government revenue
  • Reducing incidences of dumping
  • Discouraging consumption of imported goods with a view of boosting local production
  • Protecting local industries
  1. Excise duty: This is a type of tax that is imposed on goods that are manufactured and sold within a country.

Its purpose includes:

  • Raising revenue for the government
  • Discouraging the consumption of some commodities such as beer and cigarettes.

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