Definition of Tax:
“Tax is an obligatory contribution (Financial charge) from the Person (individual, company, firm, and others) to the government to meet the expenses incurred in the common interest of Society.”
“Tax is imposition financial charge which levied upon a taxpayer by Government authorities for benefit of people in the country”
Basics of Taxation
Taxation plays a prominent role in the economic development of any country. Taxation is a system through which government raises or collect revenue from Public. Governments use these revenues for the welfare of society in various forms like paying salaries of soldiers and police, Construction of dams and roads, to operate schools and hospitals, to provide food to the poor and also medical services, and for other purposes. Without taxes, any government could not exist. Taxation can redistribute a higher class society’s wealth by imposing taxes on them in order to maintain equality in society.
What do you understand by the term Tax?
In simple words, It is the part of our income which the Government collects from us and provides several facilities like, water and drainage system, school facility, medical facilities, construction of roads and dams and so on. Tax is a compulsory payment or contribution levied by the government authority on individuals or companies to meet the expenditure which is required for the welfare of society.
Characteristics of Tax:
It is a compulsory contribution.
It is a contribution for the benefit of society.
It is a personal responsibility.
A tax is paid out of the total income of the taxpayer.
A tax requires legal sanction.
Taxation structure (Indian Perspective)
There are mainly two directions of taxes:-
Direct Tax
Indirect Tax
Direct Tax: “It is the tax, which is paid directly by the public to the government”
“The tax whose burden directly falls on the taxpayers or it is paid directly by a taxpayer to the respective authority.” It cannot be shifted to others. E.g. Income tax.
Indirect Tax: “It is the tax, which is paid indirectly by people to the government.”
The burdens of tax indirectly fall on the ultimate consumer are called as Indirect Tax. E.g. Goods & Service Tax (GST). These are the taxes that can’t be seen by ultimate consumers.
Key differences between Direct and Indirect Tax are:-
Direct tax is levied and paid for by individuals, Hindu undivided Families (HUF), firms, companies etc. whereas indirect tax is ultimately paid for by the end-consumer of goods and services.
The burden of tax cannot be shifted in case of direct taxes while burden can be shifted for indirect taxes.
Lack of administration in collection of direct taxes can make tax evasion possible, while indirect taxes cannot be evaded as the taxes are charged on goods and services.
Direct tax can help in reducing inflation, whereas indirect tax may enhance inflation.
Direct taxes have better allocative effects than indirect taxes as direct taxes put lesser burden over the collection of amount than indirect taxes, where collection is scattered across parties and consumers’ preferences of goods is distorted from the price variations due to indirect taxes.
Direct taxes help in reducing inequalities and are considered to be progressive while indirect taxes enhance inequalities and are considered to be regressive.
Indirect taxes involve lesser administrative costs due to convenient and stable collections, while direct taxes have many exemptions and involve higher administrative costs.
Indirect taxes are oriented more towards growth as they discourage consumption and help enhance savings. Direct taxes, on the other hand, reduce savings and discourage investments.
Indirect taxes have a wider coverage as all members of the society are taxed through the sale of goods and services, while direct taxes are collected only from people in respective tax brackets.
Additional indirect taxes levied on harmful commodities such as cigarettes, alcohol etc. dissuades over-consumption, thereby helping the country in a social context.
Direct and indirect taxes are defined according to the ability of the end taxpayer to shift the burden of taxes to someone else. Direct taxes allow the government to collect taxes directly from consumers and is a progressive type of tax, which also allows for cooling down of inflationary pressure on the economy. Indirect taxes allow the government to expect stable and assured returns and brings into its fold almost every member of the society – something which the direct tax has been unable to do.
Both direct and indirect taxes are important for the country as they are intricately linked with the overall economy. As such, collection of these taxes is important for the government as well as the well-being of the country. Both direct taxes and indirect taxes are collected by the central and respective state governments according to the type of tax levied.