Strengths and weaknesses of

direct tax system in India

Group 2
Direct Taxes
• The tax is paid directly by the organisation or an individual to the
entity that has imposed the payment. The tax must be paid directly to
the government and cannot be paid to anyone else.
• The Central Board of Direct Taxes (CBDT) oversees direct taxation in
India
• Different slab rate for different types of taxes

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Types of Direct Taxes
Income Tax
• Depending on an individual’s
age and earnings, income tax
must be paid. Various tax slabs
are determined by the
Government of India which
determines the amount of
Income Tax that must be paid.
The taxpayer must file Income
Tax Returns (ITR) on a yearly
basis.
Wealth Tax
• The tax must be paid on a yearly
basis and depends on the
ownership of properties and the
market value of the property. In
case an individual owns a
property, wealth tax must be
paid and does not depend on
whether the property generates
an income or not.
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 Capital Gains Tax
• It is a form of direct tax that is
paid due to the income that is
earned from the sale of assets or
investments. Investments in
farms, bonds, shares,
businesses, and home come
under capital assets. Based on
its holding period, tax can be
classified into long-term and
short-term.
Corporate Tax
• Under the Indian Income Tax
Act, 1961, both Indian as well as
foreign organizations are liable
to pay taxes to the government.
The corporate tax is levied on
the net profit of domestic firms.
Also, foreign corporations whose
profits appear or are deemed to
emerge through their operations
in India are also liable to pay
taxes to the GOI
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Direct Tax
• Direct tax which is paid by the person to the government to whom it
is levied and charged on the income and wealth of persons.
• A taxpayer pays a direct tax to a government for different purposes,
including real property tax, personal property tax, income tax or taxes
on assets.
Strengths
• Equity :- There is social justice in the allocation of tax burden in case of direct
taxes as they are based on the principle of ability to pay. Persons in a similar
economic situation are taxed at the same rate. Persons with different economic
standing are taxed at a different rate. Hence, there is both horizontal and vertical
equity under direct taxation. Progressive direct taxation can reduce income
inequalities and bring about adequate social & economic justice.
• Certainty :- As far as direct taxes are concerned, the tax payer is certain as to how
much he is expected to pay, as the tax rates are decided in advance. The
Government can also estimate the tax revenue from direct taxes with a fair
accuracy. Accordingly, the Government can make adjustments in its income and
expenditure
• Relatively Elastic :- The direct taxes are relatively elastic. With an increase
in income and wealth of individuals and companies, the yield from direct
taxes will also increase. Elasticity also implies that the government's
revenue can be increased by raising the rates of taxation. An increase in tax
rates would increase the tax revenue.
• Creates Public Consciousness:- They have educative value. In the case of
direct taxes, the taxpayers are made to feel directly the burden of taxes and
hence take keen interest in how public funds are spent. The taxpayers are
likely to be more aware about their rights and responsibilities as citizens of
the state.
• Economical :-Direct taxes are generally economical to collect. For
instances, in the case of personal income tax, the tax can be deducted at
source from the income or salaries of the individuals. Therefore, the
government does not have to spend much in tax collection as far as
personal income tax is concerned. However, in the case of indirect taxes,
the government has to set up an elaborate machinery to collect taxes.
• Anti-inflationary :- The direct taxes can help to control inflation. During
inflationary periods, the government may increase the tax rate. With an
increase in tax rate, the consumption demand may decline, which in turn
may reduce inflation.
Weaknesses
• Inconvenience
• Evadable
• Affects The Ability to Work and Motivation Level
• Creates Social Conflict
• Reduce Incentives to Save and Invest
• High rates and low scope of coverage
• Agricultural income
• Undue reliance on indirect tax
• Benefits of tax

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Thank You

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