Disadvantages of direct taxes

In direct tax, burden of tax cannot be shifted. The disadvantages of direct taxation are mainly due to administrative difficulties and inefficiencies. The extent of direct taxation should depend on the economic state of the country. A rich country has greater scope for direct taxation than a poor country. However, direct taxation is an important aspect of the modern financial condition.

Though direct taxes possess above mentioned merits, the economist have criticized them on the following grounds:

1. Tax evasion: The tax evasion is due to high tax rates, documentation and formalities, poor and corrupt tax administration. It is easier for the businessmen to evade direct taxes. They invariable suppress correct information about their incomes by manipulating their accounts and evade tax on it. In less developed countries like Bangladesh, due to high rate of progressive tax evasion & avoidance are extensive and led to rise in black money.
2. Arbitrary rates: The direct taxes tend to be arbitrary. Critics point out that there cannot be any objective basis for determining tax rates of direct taxes. Also, the exemption limits in the case of personal income tax, wealth tax, etc., are determined in an arbitrary manner. A precise degree of progression in taxation is also difficult to achieve. Therefore, direct taxes may not always fulfill the canon of equity.
3. Inconvenient: Direct taxes are inconvenient in the sense that they involve several procedures and formalities in filing of returns. For most people payment of direct tax is not only inconvenient, it is psychological painful also. When people are required to pay a sizeable part of their income as a tax to the government, they feel very much hurt and their propensity to evade tax remains high. 
4. Narrow coverage: There is a narrow coverage of direct taxes. It is estimated that only one and half percent of the population pay personal income tax. Due to low coverage, the government does not get enough funds for public expenditure. 
5. Affects capital formation: The direct taxes can affect savings and investment. Due to taxes, the net income of the people gets reduced. This in turn reduces savings. Reduction in savings results in low investment. The low investment affects capital formation in the country.
6. Effect on willingness and ability to work: Highly progressive direct taxes reduce people's ability and willingness to work and save. This in turn may have a negative impact on investment and productive capacity in the economy. If tax burden is high, people's consumption level gets adversely affected and this has an impact on their ability to work and save. High taxes also discourage people from working harder in order to earn and save more.
7. Sectoral imbalance: There is sectoral imbalance as far as direct taxes are concerned. Certain sectors like the corporate sector is heavily taxed, whereas, the agriculture and other sectors are less taxed.