Merits and Demerits of Indirect Taxes

Merits of indirect taxes:

• Wide coverage — indirect taxes are paid, in small amounts, by every consumer who buys a taxed good or service, spreading the tax base across virtually the entire population, including those who may not earn enough to pay direct income tax at all.
• Convenient — the tax is paid in small instalments at the time of each purchase, rather than as a lump sum, making it less burdensome to pay in a single sitting than a direct tax.
• Difficult to evade — since the tax is generally built into the price of the good/service itself and collected by the seller at the point of sale, it is comparatively harder for an individual consumer to evade than a direct tax on income.
• Elastic and easy to collect — revenue rises automatically with rising consumption/production, and collection is largely automated through the seller/supplier, keeping the government's own collection cost relatively low.
• Can discourage consumption of harmful goods — a higher tax rate can be deliberately used on goods like tobacco and alcohol to discourage their consumption, alongside raising revenue.

Demerits of indirect taxes:

• Regressive in nature — since the same tax is charged on a purchase regardless of the buyer's income, it takes a proportionally larger share of a poorer person's income than a richer person's, making indirect taxes generally less equitable than a progressive direct tax.
• No direct link to ability to pay — unlike income tax, indirect tax is not adjusted based on how much the payer can actually afford. …