Demerits of indirect taxes

Business studies study module
  1. END May fuel inflation; continued increase in indirect taxes may fuel inflation as it directly increases the prices of goods and services.
  2. Less equitable/regressive; the same amount is charged on both the high and the low income earners making the tax burden to fall heavily on the low income earners. The low income earners end up paying a larger proportion of their income as tax.
  3. Can be avoided; indirect taxes can be avoided by people who do not consume the taxed commodity.
  4. Encourages falsification of records; traders may falsify their rewards in order to pay less tax.
  5. Lack of civic/contributors awareness; the tax is hidden in the price of the commodities therefore the tax payers are not aware that they are contributing anything to the state.
  6. Expensive to administer/expensive in collection; the government must employ many tax inspectors making indirect taxes expensive in collection and administration.
  7. Uncertainty in revenue collection; the government may not predict the amount of revenue yield as it is not easy to forecast sales and people can also not be forced to buy the taxed commodities.
  8. Might interfere with resource allocation; indirect taxes increases the prices of commodities and can therefore force consumers and producers to shift to the consumption and production of commodities that are not taxed.
  9. Discourages savings; increased expenditure due to increased prices will lead to low saving and hence low investments.


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