Q.What is an indirect tax? State its merits and demerits.

An indirect tax is designed so the person who legally pays it to the government isn't necessarily the person who ends up bearing its cost.

An indirect tax is a tax whose impact (who initially pays it) falls on one person, but whose incidence (who ultimately bears the burden) can be shifted — typically to the final consumer, through the price of the good/service.

Merits:

• Wide coverage — collected from virtually every consumer, including those who don't earn enough to pay income tax.
• Convenient — paid in small amounts at each purchase, not as one lump sum.
• Difficult to evade — built into the price and collected by the seller at the point of sale.
• Elastic — revenue rises automatically as consumption/production rises.
• Can discourage harmful consumption — higher rates on goods like tobacco/alcohol.

Demerits:

• Regressive — takes a bigger proportional share of a poorer person's income than a richer person's.
• No link to ability to pay — unlike a progressive income tax.
• Can burden essentials, if not carefully exempted.
• Contributes to inflation, since the tax is added to the selling price.

Describing indirect tax merits/demerits as identical to direct tax's (in reverse) without recognising the specific regressive-nature demerit, which is the single most emphasised weakness of indirect taxes in the syllabus.