Demerits of direct taxes

a. Heavy direct taxation, especially when closely linked to current earnings, can act as a serious check to productivity by encouraging absenteeism and making men disinclined to work.

b. Heavy direct taxation will clearly reduce people's ability to save since it leaves them with less money to spend.  Taxation may, therefore, act as a deterrent to saving.  Heavy taxation of profits makes it more difficult for business to build up reserves to cover replacement of obsolete or worn-out capital and thus investment.

c. Direct taxes possess an element of arbitrariness in them.  They leave much to the discretion of the taxation authorities in fixing the rates and in interpreting them.

d. They are not imposed on all as incomes earned on subsistence and non legal activities are left out.

e. Cost of collection is generally high.

f. These taxes are easily evaded either by understating the source of income or by any other means.  Such taxes thus cultivate dishonesty and there is loss of revenue to the state.