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A financial charge or other levy imposed upon a taxpayer (an individual or legal entity) is termed as Tax, collected by a state or the functional equivalent of the same, such that failure to pay, or evasion of or resistance to collection of tax, is punishable by law. Several administrative divisions also impose tax. Taxes consist of direct or indirect taxes and as a norm are paid in money.

A tax may be defined as a monetary burden placed upon individuals or property owners to aid in sustenance of the government, a payment obtained by legislative authority. A tax is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority. Direct taxes or indirect taxes are the main components of Taxes. It is paid in money or alternatively its labour equivalent (often but not always unpaid labour). India has a well-structured taxation system. The tax system in India is principally a three tier system which is based between the Central, State Governments and the local government establishments. In most cases, these local bodies take in the local councils and the municipalities. In accordance with the Constitution of India, the government can exercise the right to levy taxes on individuals and organizations. Inversely, the constitution states that no one has the right to levy or charge taxes except the authority of law. The law passed by the legislature or the parliament should back the tax being charged, so as to establish a tenet of transparency in its dealings.

Purpose of Taxes

Money generated by taxation has been utilized by states and their functional equivalents widely prevalent spanning the history to carry out a multitude of functions. Some of these incorporate expenditures on war, the enforcement of law and public order, protection of property, economic infrastructure (roads, legal tender, enforcement of contracts, etc.), public works, social engineering, subsidies, and the operation of government itself. A substantial share of taxes also goes to pay off the state’s debt and the interest this debt amasses. Governments also employ taxes to fund welfare and public services. Education systems, health care systems, pensions for the elderly, unemployment benefits, and public transportation comprise for these services. Energy, water and waste management systems also account for conjoint public utilities. Colonial and modernizing states have also put to use cash taxes to draw or force reluctant subsistence producers into cash economies.

Governments use different kinds of taxes and vary the tax rates. This is done with the objective of distributing the tax burden among individuals or classes of the populace, which is participant in taxable activities, such as business, or in reallocation of resources between individuals or classes in the population. Traditionally, the nobility were sustained by taxes on the poor. Conversely, modern social security systems are envisioned with the core aim of supporting the underprivileged, the incapacitated, or the retired by taxes on those who are still operational or working. In addition, taxes are applied to fund foreign aid and military ventures, to influence the macroeconomic performance of the economy, or to bring necessary alterations in patterns of consumption or employment within an economy.

A nation’s tax system is reflective of its communal values and/or principles of those equipped with power. To create a system of taxation, a nation needs to imperatively make a clear distinction apropos the distribution of the tax burden—that will pay taxes and how much they will pay—and how the taxes collected will be consumed in a horde of requisite areas . In democratic nations where the public elects those in charge of establishing the tax system, these choices are synonymous with the type of community that the public wishes to build. Disparately, the nations where those who are in power- influence the tax system; as against the public, which has trivial part in exercising influence over tax system.

Administrative costs are incurred by large businesses during the course of delivering revenue, collected from customers to the suppliers of the goods or services being purchased. Taxation as a process runs on the same tenets. The amount which can be used by the government is substantially lesser than the amount that is generated by collection of taxes from the public. The difference is termed the- compliance cost, and includes, for example- the labour cost and other similar expenses incurred in complying with tax laws and rules. The collection of a tax in order to spend it on a specified purpose, for instance – collecting a tax on alcohol to pay directly for alcoholism rehabilitation centres, is termed as hypothecation. On the flipside, this practice reduces the freedom of action on part of finance ministers, owing to which, the practice has found serious discredit with the ministers. Some economic theorists reckon the notion to be intellectually deceitful. Furthermore, it is a commonplace phenomenon that taxes or excises initially levied to fund some specific government programs are later converged to the government general fund. There is a high degree of inefficiency prevalent in collection of such taxes. For Example – Highway Toll.

In our next blog post we’ll discuss the Direct taxes.