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Direct and indirect taxes are both a part of the Indian taxation system. Direct taxes, which include income tax, wealth tax, capital gains tax, and other similar taxes, are those that must be paid on an individual’s or entity’s income. Taxes levied on goods and services are referred to as indirect taxes or goods and services taxes. This tax is collected by the government on a variety of goods and services that consumers buy or use, rather than having to be paid beforehand out of one’s earnings.
Collectively, these taxes affect how resources are distributed and how people behave economically.
- Effect on consumer habits
Reduced consumption would result from lower disposable income. A consumer would have to settle for less than he would have consumed had his disposable income been higher because of the reduced amount that was accessible to him. Consumers would be forced to accept smaller quantities as a result of an increase in the final pricing at which goods and services are passed on to final consumers. As a result, the consumer can now afford a smaller quantity of goods or services with fewer resources than he previously could. Thus, taxes affect consumers’ patterns of consumption.
- Influence on savings
The capacity to save is also influenced by lower discretionary income. With less money available, the person would have to make all necessary payments, which could have a negative influence on investments. The impact of taxes would be detrimental to a person’s capacity for saving.
- Impact on resource allocation
Direct tax burdens lead to less money in the hands of consumers or taxpayers. This indicates that the taxpayer’s allocation would be less than it would have been had income tax not been levied on his income. Thus, the direct tax reduces the number of resources available to consumers.
On the other side, the indirect tax would raise the cost of products and services. The consumer would ideally need to commit more money to any given commodity or service than he would have if prices were lower.
- Impact on employment opportunities
With less discretionary income and a change in spending habits, there will inevitably be less demand for goods and services. Additionally, it can indicate a change in consumption habits away from goods and services subject to high taxes. Reduced demand for particular products and services could result in decreased production, which would ultimately affect job possibilities.
- Consumer protection tax laws
It may be in the best interests of society to impose taxes on some goods that are detrimental to consumers. For instance, excessive tax burdens on goods like cigarettes and alcohol would drive up the cost of these goods and make them unaffordable for consumers. In these situations, taxes benefit consumers.
- Equal treatment of customers
The way the tax code is set up means that taxes are paid in proportion to the amount of income. People with greater incomes must pay higher taxes, while those with lower incomes must pay lower taxes. People who make less than a threshold are entirely free from paying taxes. Increasing the purchasing power of those in lower income brackets while shifting the tax burden on those who are generally better off. This also tries to equalize consumer spending power.
The bottom line
Therefore, taxes and the appropriate rates greatly affect taxpayers or final consumers. To address the consequences of inflation and growing prices, tax slabs and rates are periodically revised. The customers stand to gain more disposable income because of exemptions granted up to higher income levels or a reduction in the relevant rates of goods and service taxes for specific goods and services. CAC – one of the leading tax law firms in Delhi – is here to help you if you need tax guidance for your business or yourself. This corporate consultant company provides tax consulting services, compliance outsourcing financial services, etc. to help you manage your business and tax planning efficiently.