This will harm the production of goods or services. The reduced demand for goods and services will negatively affect employment and production. When indirect taxes are imposed, the prices of the goods and services will increase.
This will result in higher production costs because the prices of the raw materials will increase. The cost of wages and salaries will increase too since workers will demand increased salaries to caters for the increased costs of goods and services. The higher wages and salaries will result in higher prices. Hence, indirect taxes create inflationary pressures in the economy and result in inflationary spiral-overs.
This is a disadvantage to the government. When indirect taxes are levied, it is difficult to make an accurate assessment of the income of all classes of people since the taxes do not impose equal tax burdens on all classes of people.
Hence, assessing the income of the people is difficult. Negative effect on work and savings. Governments have many responsibilities among them developing the country. For the government to perform its responsibilities, it requires revenue. There are several sources of government revenue such as direct, indirect taxes and non-tax sources of revenue both domestic and international sources.
This post addressed some of the advantages and disadvantages of indirect taxes to the government as the tax levying body. There are other advantages and disadvantages that were not addressed. Feel free to send us questions or topics on tax and investments in Kenya that you would wish to be covered in this Website. This post is for general overview and guidance and does not in any way amount to professional advice. Consequently, www. Kenyan taxpayers must always rely on the most current information from KRA.
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Blog on Tax. Introduction Governments have a choice to either levy direct or indirect taxes. Post continues after the photo. Photo by Waka However, the impact of tax and the incidence of tax are not on the same person in indirect taxes. What is indirect tax? Examples of indirect taxes There are many types of indirect taxes. However, the following are some examples of indirect taxes are: Value-added taxes Excise taxes. Sales taxes What are the advantages of indirect taxes to the government?
The following are some of the advantages of indirect taxes to the government: a. Wide scope Indirect taxes can put everyone in the tax net irrespective of whether one is in the high, middle or lower social strata in the society. Flexible not fixed Majority of indirect tax rates are not fixed but flexible. Economical to collect Indirect taxes are collected on behalf of the government by appointed taxpayers.
Greater coverage Governments use indirect taxes to widen the tax base in the country. Reduction of tax evasion opportunities Since indirect taxes are included in the price of the goods or services, the consumers do not have a leeway to negotiate the taxes in the prices of goods or services. Controls consumption of harmful products Taxes are often used to control consumption of specific goods that the government deems harmful to the consumers or the environment.
Protection of domestic economy Every government has the mandate to protect the domestic economy from interference from outside economic, social and political forces through the dumping of cheap products and services.
One of the purposes that may make the congress to impose a tax is to increase the revenue of the government. When the revenue is increased, the federal government is able to provide the basic services to its citizens. A direct tax is tax paid directly to the Government, by a person whom the tax is imposed on. An indirect tax is paid indirectly to the Government, trough a third party. A direct tax would be taxes like income taxes, where a person must personally pay a certain amount to the government.
Indirect taxes are taxes such as property, social security, and sales tax, where there price of tax is either deducted from wages or added onto the payment of an item. The indirect taxes are paid the Government by the business that collects the tax.
It is also easier for the consumer to pay the amount in installments rather than paying a huge amount to the government for the betterment of economy. Indirect tax is a tax that is shifted from one taxpayer to another through an increase in the price of the good. Service tax is an example of an indirect tax because it is collected by an intermediary. Income tax is a direct tax levied on your earnings. An indirect tax is the tax you pay if you buy something, after all, you don't have to buy the goods and so pay the indirect tax.
One example of indirect tax is Income Tax. Log in. Taxes and Tax Preparation. See Answer. Best Answer. Governments impose indirect taxes to Study guides. Q: Why do government impose indirect tax? Write your answer Related questions. Is the tax on food items a direct or indirect tax? Thus, as Dr. Since the poor sections of a community have a high marginal propensity to consume when their income rises, they tend to spend more on consumption.
If the rise in aggregate consumption level is allowed, then the increase in productivity under public investment is fully absorbed by the increased consumption.
If this is to be checked, commodity taxes are inevitable. By restraining consumption, the increased productivity will be made available for investment in the capital goods industries. To effectuate a purposeful diversification of resources, indirect taxes can be regarded as a useful measure for the transfer of purchasing power from the consumer class to the government who will make an effective use of these resources for capital formation and welfare-motivated public spendings.
Again, differential commodity taxation may cause a transfer of resources from non-essential to essential goods when the former are heavily taxed. To provide protection to the domestic industries, import duties are usually devised in developing economies. India, for instance, has imposed heavy import duties on many items with the object of encouraging the production of import substitutes and protecting the growing domestic industries from cut-throat foreign competition and also to conserve valuable foreign exchange reserves by curbing the propensity to import.
To help in correcting the disequilibrium in the balance of payments, import duties are so designed as to curtail imports, thereby to improve the position of the balance of trade of the country. Thus, the consideration of protective and equilibrium effects of import duties is more significant than their revenue effect in a developing economy like India.
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