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Direct taxes

In case of direct tax, the incidence and impact of tax are on the same person. Examples are income tax and wealth tax.



Let’s say Mr. Narayan Rao earned  4 Lakhs in the year 2010 and ₹ 8 lakh in year 2011. In this scenario he will be liable to pay say  30,000 as tax in the year 2010, which will be say  50,000 in year 2012. Please bear that the tax amount mentioned in this example is fictitious amount. So, by incident here means earning and impact means tax payable. Mr. Narayan Rao is earning the amount, so he is liable to pay the tax.



  • Progressive: They are imposed according to the ability of a person to pay. Higher the income, higher the tax a person has to pay.
  • Elastic: Revenue is income elastic. In other words, as income rises, tax revenue increases in a greater proportion.
  • Certainty: A person paying tax knows how much he has to pay and the basis for it.
  • Social objective: Taxes shift the income from the rich to the poor by providing amenities to the poor. Thus, it helps in reduction of inequalities of income.
  • Civic consciousness: Tax payers tend to take keen interest to see that these funds are properly utilized.


  • Arbitrary: The ability of a person to pay cannot be precisely determined. Only a rough idea about it can be formed.
  • Tax evasion: Direct taxes depend on the honesty of a person. This is because, it is possible to hide the real sources of income and thus, evade tax.
  • Maintenance of accounts: It becomes difficult to impose taxes when proper books of accounts have not been maintained. Some of the tax payers may not be able to maintain accounts properly.
  • Inconvenience: The assessment procedure is elaborate and complex. This points out at the need of expert assistance of tax advisors. Thus, to a normal tax payer, it is a matter of complication and inconvenience.
  • Discourages work: Since those who work more earn more and pay more, people are discouraged to work.

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