Taxation refers to the act of levying taxes on the citizens of a country through a well-defined tax structure developed by the government of the country.
A Tax is a compulsory payment made by the citizens of a country to the government to meet expenditures of public authorities and for the common welfare of all, without any expectations of any specified and special returns from the Government.
According to Seligman – “A tax is a compulsory contribution from a person to the government to defray the expenses incurred in the common interest of all without reference to special benefits conferred.”
Characteristics of Tax
- It is a compulsory contribution, a person cannot evade tax but refrain from paying it by not consuming a taxed product or service.
- It is spent on public welfare activities – generally non-tax payers are benefitted more from it than tax payers.
- It does not provide a specific benefit – According to Pigoo – “The essence of tax is the absence of a direct quid-pro-quo between the tax payers and public authorities.”
- It is the duty of a citizen to pay tax.
- It is not a cost for a service.
- The assessment and realization of tax depends upon the constitutional authority.
Objectives of Tax
- To raise revenue for welfare activities and economic development
- To regulate the economy
- To reduce inequality in distribution of income
- To maintain the National Income and control inflation
Canons of Tax | Canons of Taxation
Characteristics of a good tax system
- It must be Equitable i.e. the burden of taxation should be minimum. It must be distributed between different sections of the society in a just and equitable manner and in such a way that the burden of tax lies more on the rich and less on the poor.
- It must be elastic i.e. Proper blend of direct and indirect taxes. By blending a variety of direct and indirect taxes together efforts must be made to reduce the scope for tax evasion to the minimum.
- The government must keep in mind the convenience of the tax payer while devising a tax system.
- Certain sources of income must be reserved for situations like war, floods, natural disasters etc.
- It must follow the objectives of maximum social advantage.
- It must include all the canons of tax.
- It must be productive.
Kinds of Tax | Types of Taxes
According to Bustle, “ Taxes which are levied on permanent and recurring occasions are direct taxes. Taxes which are charged on occasional or particular events are indirect taxes.”
According to Dalton, “A direct tax is really paid by the person on whom it is partially or wholly imposed, while an indirect tax is imposed on one, but paid partially or wholly by another owing to a consequential change in terms of some contract or bargain between them.”
Direct Tax – It is a tax, the burden of which is directly borne by the person on whom it is levied. Thus the impact and incidence of tax lies on the person on whom it is levied. E.g Income Tax, Corporate Tax, Tax on Capital gains.
Indirect Tax – In indirect tax, the burden of tax is partially or wholly borne by a person who does not directly pay the tax i.e. one person pays the tax and another bears the burden of tax. In such a case the impact and incidence of tax fall on more than one person. E.g. Sales Tax, Service Tax, VAT, Custom duties and Octroi, Excise duty
Progressive Taxation – In Progressive Taxation an exemption limit is fixed by the government and all individuals falling below that limit are granted exemption from tax payment while the rate of tax increases in a progressive manner for those who lie above the exemption limit.
Proportional Taxation – In Proportional Taxation the income of all tax payers taxed at a uniform rate irrespective of their income level. The tax rate does not change with the change in income of a person.
Regressive Taxation – In Regressive Taxation, the rate of tax decreases with increase in tax payer’s income. It is the opposite of progressive taxation.
Digressive Taxation – It is a mixture of progressive and proportional tax. In this the tax rate is progressive up to a certain limit and then becomes proportional after that limit. Thus the tax rate increases with increase in a person’s income up to a certain limit, thereafter becomes constant.
Specific Tax – It is levied on the basis of number, size or weight of a commodity.
Ad-Valorem Tax – It is levied on the basis of price of commodity.
Illustration of tax free government securities