Disadvantages of indirect taxes

  1. Regressive in nature: Indirect taxes are not equitable. Central excise, VAT etc. does not make any discrimination between rich and poor. Whether a rich man buys a commodity or a poor man, the price in the market is the same for all. Hence, rich and poor pay the same amount of tax, which is obviously unfair.
  2. Reduces demand for goods and services: Indirect tax, always add to the price of the goods and services, as a consequence demand for goods and services reduce. Hence indirect taxes are perceived as inflationary.
  3. Uneconomical: The cost of collection is quite heavy. Every source of production has to be guarded. Large administrative staff is required to administer such taxes. This turns out to be a costly affair.
  4. Harmful for industries: Excise duty is payable by the producer, manufacturer, transporter etc. for raw materials, machineries, finished goods etc. and the custom duty is payable on imported plant and machinery, raw material and finished goods. This gives rise to the increase in the cost of production and hence the demand for a particular goods and service declines and threatens the well-being of the entire industry.

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