Advantages and

Disadvantages of Taxation
System

advantages and disadvantages

of tax system 1
What is taxation system?
A world taxation system is a proposed system for the
collection of taxes by a central revenue service. Taxation is a
tool commonly used by government as a means of
redistributing income amongst its citizens. In some
instances, taxation can have a positive effect on the
redistribution of income, other times, it can do more harm
than good. In its sense taxation system has two types
narrated next.

advantages and disadvantages

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Types of taxation:
Direct tax: Indirect tax:
 Direct Taxes are  An indirect tax is levied
the taxes that are levied on goods or services,
on the income of which increases the
individuals or price of a good or
organizations. They services. The tax
include Income tax, is actually paid by the
corporate tax, end consumer, by way
wealth tax and of a higher retail price.
inheritance tax. They include tax on
cosmetics and other
goods of daily use.

advantages and disadvantages

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 Direct taxation:
Advantages Disadvantages

 control inflation,  Reduce purchasing

Through increasing of
various taxation rate,
taxation can be used as
the means of controlling
inflation especially the
demand pull inflation.
Since raising of taxation
rate of various commodity
result into decrease in
purchasing power
of individual person
hence being a solution to
demand pull inflation.
power, Taxation
especially when the tax
rate are high has the
tendency of reducing the
disposable income of an
individual which
subsequently reduce the
purchasing power.
advantages and disadvantages
of tax system 4
Cont ..
Advantages Disadvantages

 Discourage saving,  Discourage investment,

Since taxation rate reduce
the disposable income of
an individual, this means
an individual saving
ability will be reduced.
Hence from, this money
can not remain in just few
hands and it remains
revolving.
Heavy tax rate on firm
profit become disincentive
for investor to invest on
particular sector instead
investors will opt to invest
in other sector which their
tax rate is of reasonable
value.

advantages and disadvantages

of tax system 5
Cont ..
Advantages:
 Redistribution of
income, Through
taxation system especially
the progression tax
system taxation can be a
means of ensuring fair
distribution of income
between individuals by
imposing high tax rate for
those who earn more and
less tax rate for individual
who has lower income,
this also can lead to
reduction of income gap
between poor and rich
people.
Disadvantages:
 The another
disadvantages of a direct
tax is that it is liable to be
evaded. By submitting
false returns, many
people try to evade
income tax. Unless the
civic sense of the people
is well — developed and
there is spread of
education among them,
the administration of
direct taxes is very
difficult.
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Cont ..
Advantages:
 When the people are fully
aware of the payment of
taxes, they are also
conscious of the way the
government spends the
money. They resent
unproductive or wasteful
expenditure. As a result,
the government becomes
careful in its expenditure.
Disadvantages:
 People’s Indifference:
When a man directly
bears the burden of a tax,
he tries to know how the
government spends that
money. Those who are not
directly affected by the
burden of taxation remain
indifferent as to the way
the public expenditure is
incurred.
advantages and disadvantages
of tax system 7
Cont ..
Advantages: Disadvantages:

 Direct taxes constitute an  Since not everybody has

important source of
government revenue.
Their collection charges
are also low. Therefore,
direct taxes are
productive.
to pay direct taxes, it is
often responsible for
creating social conflict
amongst societies. It also
leads to crimes, social
injustice and a sense of
inferiority among different
groups of people.

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Cont ..
Advantages:
 Paying the right amount  Taxation can increase the
of business taxes
provides good credit
rating to financial
institutions and agencies.
You can use your good
credit rating when
getting a loan for
additional funds for the
expansion of your
business or other
purposes.
Disadvantages:
expenses that businesses
face, which makes it more
difficult for them to achieve
profitability. Businesses pay
numerous taxes, such as
payroll taxes on employee
wages, property taxes,
business taxes and fees for
permits and licenses.
Business-related taxes leave
less money for expanding
businesses through
investment and hiring. High
business taxes may
encourage outsourcing of
operations abroad.
advantages and disadvantages
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Cont ..
Advantages: Disadvantages:

 Direct tax enhances the  Direct tax gives mental

consciousness of the pinch to the taxpayers as
citizens. Taxpayers feel they have to curtail their
burden of tax and so they income to pay to the
can insist the government government.
to spend their
contributions for the
welfare of the community.

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Cont ..
Advantages: Disadvantages:

 Taxation helps greatly in  The main problem of

the redistribution of
income as it gives the
government funds which
they can use to fund
public services.
using taxation to
redistribute income is
the possibility
of ridiculously high
effective tax rates.
Though one might think
that high effective tax
rates would equate to
more tax revenue, a high
tax rate would give
citizens a disincentive to
work.
advantages and disadvantages
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 Indirect taxes:
Advantages Disadvantages
 The Poor Can  Regressive: Indirect
Contribute: They are the
only means of reaching
the poor. It is a sound
principle that every,
individual should pay
something, however little,
to the State. The poor are
always exempted from
paying direct taxes. They
can be reached only
through indirect taxation.
taxes are not equitable.
For instance, salt tax in
India fell more heavily on
the poor than on the rich,
as it had to be paid at the
same rate by all. Whether
a rich man buys a
commodity or a poor
man, the price in the
market is the same for all.
The tax is wrapped in the
price. Hence, rich and
poor pay the same
amount, which is
obviously unfair. They are
thus; regressive.
advantages and disadvantages
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Cont ..
Advantages Disadvantages

 They are convenient to  Uncertain: Unless

both the tax-prayer and
the State. I he tax-payers
do not feel the burden
much partly because an
indirect tax is paid in
small amounts and partly
because it is paid only
when making purchases.
indirect taxes are imposed
on necessaries, we cannot
be sure of the revenue
yield. In the case of
goods, with an elastic
demand, the tax might
not bring in much
revenue. The tax will raise
the price and contract the
demand. When the thing
is not purchased, the
question of the tax
payment does not arise.

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Cont ..
Advantages: Disadvantages:

 By imposing custom  Through heavy custom

duties on imported
products the govt. is
taking part in encouraging
the domestic industries
and its products.
duties thing needed for
the production of goods in
domestic industries will
not be prepared with
changing demand of
customers.

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Cont ..
Advantages: Disadvantages:

 Through higher anti  Through anti dumping

dumping duty the
central govt. discourages
the exporters to export
the domestic goods in less
price.
duties, Goods produced
in plenty in our country
can not be exported and
hence these goods
becomes unusable and
provides no benefits to
the traders.

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Cont ..
Advantages Disadvantages

 Broad-based: Indirect  Raising Prices Unduly:

taxes can be spread over
a wide range. So they are
more beneficial and
suitable.
 Easy Collection:  The cost of collection is
Collection takes place
automatically when goods
are bought and sold. A
dealer collects the tax
when he charges a price.
He is an honorary tax
collector.
They cause the price of an
article to rise more than
the tax.
quite heavy. Every
source o production has
to be guarded. Large
administrative staff is
required to administer
such taxes.
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Cont ..
Advantages Disadvantages

 They are very elastic in  They discourage

yield, imposed on
necessaries of life which
have an inelastic demand.
Indirect taxes on
necessaries yield a large
revenue, because people
must buy these things.
industries if raw materials
are taxed. This will raise
the cost of production and
impair their competitive
capacity.

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of tax system 17
 Cont ..
Advantages Disadvantages
 Discourage use of harmful  No Civic
products, As there are many Consciousness: These
harmful products which are taxes do not develop civic
produced in various country consciousness, because
but the manufacture of such many times the tax-payer
products may at the same does not even know that
time being a good tax payer,
he is paying tax. The tax
The government may not
decide to shutdown such is concealed in the price.
companies instead the
government will impose high
tax upon such commodity to
discourage users from
consumption of such
commodity, example cigarette
and spirits. advantages and disadvantages
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