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Tax is a compulsory change imposed by the government on the people and institutions. The people do not receive direct benefits for text payment. The test is compulsory in the sense that nobody can reject to pay tax. It is the main source of government revenue.


According to Tylor: " Taxes are compulsory payment to the government without expectation of direct benefit in return to the taxpayer ".

A tax is quid-pro-quo and has the following feature:

  • Tax is a compulsory payment.
  • People do not receive direct benefits from the tax.
  • The fund rises from tax is spent on public welfare.

Types of taxes

Taxes are broadly classified into two types on the basis of impact and incidence they are:
a. Direct Tax
b. Indirect tax

A. Direct tax

The tax which cannot be shifted to another is called direct tax. Direct taxes are the taxes on property, profit, and income. The Impact (initial burden) and incidence (final burden) districts fall on the same person. For example, income and property taxes are the direct taxes that should be paid by the person on whom it is imposed and cannot be shifted.

Merits of Direct taxes

1. Equality: This is based on the ability to pay principle. Hence, this has a feature of equality. Since the rate of tax increases with an increase in income more burdens fall on the rich.

2. Certainty: The taxpayer knows the amount to be paid time of payment and method of payment of tax. Similarly, the government was the revenue to be earned from this tax. Hence, the tax has the feature of certainly. 

3. Elastic: The direct test is elastic. The revenue from direct taxes Rises with an increase in income or property and decrease with an increase in income and property. similarly, the government can Rises the rate of taxes to increase revenue.

4. Economy: The direct tax is detected from the source. It has to be paid to the person himself on whom it is imposed hence the cost of collection is less and economical.

5. Productive: The direct is productive. The revenue from distance increases with an increase in national income.

6. Progressive: The direct can be made progressive. This means data hire rates can be fixed for those having more income and property. This helps to reduce the inequality of income in the property.

7.Educative: the direct tax creates people's awareness. It makes the taxpayers aware of their obligation. Similarly, they become aware of how and where the government spends the money raised from them.

8. Anti inflationary: The direct tax is an important weapon to reduce inflation. The purchasing power of man can be reduced by rising the. this helps to reduce inflation.

Demerits of Direct Taxes

1. Inconvenient: The taxpayers should keep records or accounts for the regulation of direct tax. It is inconvenient to keep an account and to visit text frequently. It is inconvenient also for the reason that this tax should be paid in a lump sum amount.

2. Evasion: The taxpayer may submit the wrong records in the tax office and Conceal actual income for tax evasion. Hence, there is a tendency for evasion indirect tax. This creates economic ills back marketing, corruption, and concealment of Black Money. Insert the direct tax is levied on honest and the dishonest are free to text.

3. Arbitrary: The directory is not based on any scientific formula. The Ministry of Finance it in an arbitrary manner. It may have a serious effect on people. In reality, there is no objective criterion of ability to pay tax.

4. Narrow-based: The best of this test is narrow. Since this tax is imposed on the rich; it does not cover all classes of people. Hence, the revenue from it is very low in a country like Nepal where the majority of the people are poor.

5. Lake of inspiration: The directors kill the spirit of people to work more, earn more save and invest more. This clearly affects capital formation.

6. Affects Capital formation: Direct taxes can affect Savings and investment. Due to the net income of the people gets reduced. This intron reducing savings. Reduction in savings results in low investment. The low investment affects capital formation in the country.

B. Indirect tax

That which can be shifted to order is called an indirect tax. Indirect taxes are the taxes on consumption and production. The impact (initial burden) and incidents (final burden) of this tax fall on the different person. In this case of indirect tax, the body of text can be shifted by the taxpayer of someone else. Indirect tax has the effect of raising the price of the products on which they are imposed. Sales tax, VAT, Excise duty, costumes duty, etc are examples of indirect taxes.

Merits of indirect taxes

1. Convenient: As the tax is paid by the consumers while purchasing goods and services it is convenient to make payment. The text is concealed in the price and the burden of tax is not felt. This cash can be collected by the government from producers or importers. So it is convenient for the government too.

2. Difficulty of evasion: It is difficult to evade indirect tax.Since the text is included in the price the purchaser of goods should pay the tax compulsorily.

3. Broad-based: The commodities are consumed by both the rich and poor people. Hence all those who consume the commodity, pay it. It is an important device to bring the majority of people within the text net.

4. Social value: The indirect tax has social value as well. The imposition of high taxes on harmful commodities like cigarettes alcohol discourages their conception.

5. Progressive: The internet test can also be made progressive to some extent. It is done by imposing a low tax on the goods of mass consumption in hi tax on luxurious goods. Consequently, the burden of the tax falls more on the rich and less on the poor

6. Elastic: The indirect tax may be elastic as indirect tax. These taxes are imposed on goods having inelastic demand. This helps to increase revenue by increasing the .tax rate according to need. But this is against the principle of equity.

Demerits of indirect taxes

1. Inequality: The indirect test is not equitable. The rich and poor should be taxed at the same rate. False comparatively more on the poor. In this sense in directors is regressive. Increase inequality of income.

2. Uneconomical: Many staff should be recruited to collect this tax. Hence, the cost of collection of tax may be higher than tax revenue.

3. Uncertainty: When the tax rate has increased, the price of the commodities also increases. Therefore people reduce the consumption of those commodities. They also use substitute goods if available. Hence, there is no certainty of revenue from this source.

4. Uneducative: The indirect text is invisible. There is no direct relationship between the taxpayers and the government. The people do not directly feel the burden of the tax. Hence, it does not create people's awareness.

5. Inflationary effect: Since the indirect tax is included in the price of the commodity it increases the price level. It thus may adversely affect the lives of common people.

6. Unproductive: The indirect tax increases the price of the goods and reduced savings. This directly affects capital formation and obstructs industry and Commerce.

7.Smuggling and corruption: The indirect tax-like custom encourages smuggling and corruption. Likewise, the tax officers help the traders to escape tax buy undervaluation of goods. Hence, corruption is encouraged by indirect tax.


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