Advantages and Disadvantages of Indirect Tax

Indirect Tax

Indirect Tax

 Indirect Tax

Thus an indirect tax is conceived as one which can be shifted or passed on: a direct tax as one which cannot be transferred. An indirect tax is that levied on the sale or purchase of any goods or services other than personal services and that can be transferred. 

 Advantages and Disadvantages of Indirect Tax

Indirect taxes have the following advantages:


Indirect taxes are less inconvenient and less burdensome. They paid only when a commodity or a service  bought.

Wide Coverage

These taxes reach the pockets of all income groups low, middle and high. They are levied on necessaries, comforts, and luxuries, thus they have a wide coverage.


Indirect taxes are also elastic in nature. The government can reduce or increase the rates.


These taxes are economical in the sense that they involve little cost of collection because the producers are sellers themselves deposit them with the government.


Indirect taxes satisfy the canon of diversity. They can be levied on a variety of commodities and services.

Less Evasion

There is less possibility of evasion in the case of indirect taxes because they are included in the prices of commodities.

Check the Consumption of Harmful Goods

Indirect taxes have the great worth of checking the consumption of injurious goods like wine, cigarettes and other intoxicants.  The state levies heavy duties on such articles of consumption which are injurious to health.

Powerful Tool of Economic Policies

Indirect taxes can be used as a powerful tool for implementing economic policies by the government. If the government wants to protect domestic industries from foreign competition, it can levy heavy import duties. This will help to develop domestic industries.

Disadvantages of Indirect Tax

The following are the disadvantages of indirect taxes:

Uncertain Revenue

The revenue from indirect taxes is uncertain because it is not possible to accurately estimate the effect of such taxes on the demand for products. If a heavy excise duty is levied on some luxury articles, its price will rise. Since the demand for luxury goods elastic, its sales may adversely affected by a fall in demand and the state revenue may actually decline.


These taxes are uneconomical in that the cost of collection to the state is heavy. The state has to appoint inspectors to check the accounts and stocks of producers, wholesalers, and re-trailers.

Bad Effect on Production and Employment

Sometimes, these taxes adversely affect production of commodities and even employment. When the price of a commodity increases with the levy of a tax, its demand falls.

Feed Inflation                                                                                                                

Another demerit of indirect taxes is that they feed inflation. Imposition of these taxes leans to increase the prices of commodities.

Lack of Civic Consciousness

A person who buys commodity does not know that he is paying a tax to the government in the price of the commodity. Therefore, such taxes do not in accumulate civic consciousness.

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