Question

To which tax are these terms relevant? Explain any one merit and two demerits of this tax.

Answer 1

Merits of indirect taxes:

Broad coverage: In the tax on the commodity, all the buyers of the commodity have to pay indirect tax irrespective of the income level whether they belong to the high-income group or low-income group. By widening the tax net, the government can yield more revenue for public expenditure.

Demerits of indirect tax:

Uncertain: Taxes on goods with elastic demand are very uncertain. When the commodity is taxed, prices of the commodity increase, which reduces the demand for the commodity in the market. Hence, the revenue from the indirect tax is uncertain.

Discourage savings: Most of the income is spent on consumption of goods where the price of goods includes indirect tax, thus making savings impossible.