TAXATION

TAXATION

Taxation

It is a sum of money (fee) demanded by a government for its support or for specific facilities or services, levied upon incomes, property, sales, etc.

Taxation is the main source of finance for the government. Taxes may be levied on

§  Income (Income Tax, Corporation Tax etc..)

§  Expenditure  (Value Added Tax i.e., VAT)

§  Wealth (Inheritance Tax)

Reasons for Taxation

There are various reasons for the imposition of tax. The following are some of them…

§  To raise government revenue:

Imposition of tax raises revenue for the government to pay for public goods and services and merit goods and services.

§  To reduce purchasing power:

Lower earnings due to taxation reduces consumer spending in the economy. It helps to keep price stability

§  To reduce inequalities in the distribution of income and wealth:

Transfer payments made to the poor out of tax revenue from the rich helps reduce the gap between the rich and the poor.

§  To protect domestic infant industries:

Imposition of tax helps reduce stiff foreign competition by reducing imports

§  To improve the balance of payments position:

Imposition of duties to restrict imports helps reduce balance of payments deficit.

§  To discourage the consumption of harmful goods:

Imposing taxes on harmful goods like cigarette, alcohol will reduce the consumption of harmful goods.

Features of good tax

§  A good tax system should lead to fair and equal distribution of wealth in the community.

§  It should be composed in such a way that it yields sufficient revenue to the government.

§  The cost on collection of taxes should not be excessive.

§  The burden of taxes should be distributed in proportion to the ability of the tax-payer.

§  A tax should not discourage to work, save and invest.

Types of taxes

There are two types of taxes…

1)      Direct Taxes

2)      Indirect Taxes

Direct Taxes

A tax that is paid directly by an individual or organization to the (government).

Direct tax is levied on income (Income Tax), profits or gains (Corporation Tax), properties or assets (Inheritance Tax)

Advantages of Direct Tax

§  Equitable (Fair and Impartial):

Direct tax is equitable as it is imposed on person as per the property or income.

§  Certain:

Time, procedure and amount of tax paid to be paid is known with certainty.

§  Economical:

The cost of collection of direct taxes is small. There is no intermediary between the tax payer and the state.

§  Elastic:

Direct taxes have a high degree of elasticity. There rate can be change according to the needs of the country.

§  Enhance consciousness among citizens:

Taxpayers feel burden of tax and so they can insist the government to spend their contributions for the welfare of the community.

Disadvantages of Direct Tax

§  Chance of dishonesty:

To avoid from direct tax, the tax payer submits false statements of his income and revenue of state reduces.

§  Inconvenient:

The tax payer has to prepare lengthy statements of his income and expenditure. It is very laborious for the tax payer to prepare and keep these records.

§  Painful for the Tax Payer :

It pinches the tax payer that hid hard earning money is being taken by the government.

§  Lump sum Payment :

Direct tax is to be paid in lump sum every year so it becomes very difficult for the tax payer to pay large amount in one installment.

§  Reduction in Savings :

Direct tax discourages the rate of saving because the major portion of the income is paid to the government.

Indirect Taxes

Indirect tax is a tax levied on goods or services rather than on persons or organizations.

Indirect taxes are collected by the seller on behalf of the government in the form of

§  Value Added Tax (VAT)

§  Excise Duty

The impact of an indirect tax is on the person who pays it first. Its incidence is on the person who pays it last (consumer).

Advantages of Indirect Tax

§  Convenient in Payment :

It is very easy to pay because they are included in prices. The consumer often does not know that he is paying the tax.

§  No One can Evade the Tax :

Anyone who will purchase the taxed commodity will pay the tax. So it is not possible to evade indirect tax.

§  Contribution from Every Citizen :

Indirect tax is very useful because every member of the society contributes something towards the revenue of the state.

§  Elastic :

Indirect tax is also elastic to a certain extent. The state can increase its revenue within limits by increasing the rate of taxes.

§  Control on Harmful Goods :

If the state wishes to discourage the consumption of harmful drugs, it can raise their prices by increasing the taxes on them.

§  Tax on Luxury Items :

The indirect tax satisfied the canon of equality for luxury products. If it is imposed on luxury goods, then rich people will pay more taxes and poor will not pay because they do not purchase it.

Disadvantages of Indirect Taxes

§  Unfair Profit :

The traders may increase the prices more than the rate of taxes and they earn abnormal profits. A consumer suffers a loss.

§  Not an Economical :

Indirect tax is uneconomical. The government spends a large amount of money on the collection of taxes.

§  Uncertain :

The revenue from indirect tax is uncertain. The government cannot correctly estimate as how much money will it receive from this tax.

§  Civic Consciousness cannot be Created :

It does not create the civic consciousness because the tax is wrapped up in prices.

§  Does not Satisfy the Canon of Equality :

This tax is imposed on all the classes according the same ratio for necessary goods also. The burden of tax falls more on poor people than on the rich.

§  Low Standard of Living :

When the tax is imposed on the consumption of goods, it increases the prices and lowers the standard of living in the country.