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Meaning and Definition of Taxes
In any country, the government receives income from tax revenue, non-tax revenue, and foreign aid to cover public expenditure. Among these three sources, tax revenue is considered the main source of public income. Tax is the monetary income compulsorily collected by the government of any country from its citizens.
When paying taxes, the taxpayer does not receive any direct or immediate return from the government. However, the government can spend the collected amount on areas that provide indirect benefits or advantages, such as road construction, drinking water facilities, and the development of health and education.
According to Adam Smith (1776), "A tax is a contribution from individuals to the government to defray the expenses incurred in providing common benefits to society."
In the words of Dalton (1922): "A tax is a compulsory contribution imposed by a public authority, irrespective of the exact amount of service rendered to the taxpayer in return."
According to Seligman (1895): "A tax is a compulsory contribution from a person to the government without expectation of a direct and proportionate return."
Therefore, a tax is a compulsory amount collected by the government from the public, in exchange for which the government does not provide any direct facilities or benefits to the taxpayer.
However, the income received is invested in the economic and social development of the taxpayer.
Types of Taxes
Generally, taxes are divided into two categories: direct taxes and indirect taxes. A brief discussion is given below:
(a) Direct Taxes
A direct tax is a tax imposed by the government on an individual or entity, the burden of which cannot be shifted to another individual or entity. In this type of tax system, it is not possible to shift the tax burden from one party to another.
The individual or entity on whom the tax is imposed must pay the tax compulsorily. The final burden of the tax is also borne by the same individual or entity. This type of tax system includes income tax, road tax, land tax, house tax, vehicle tax, profit tax, etc.
(b) Indirect Taxes
An indirect tax is a tax imposed by the government on an individual or entity, the burden of which can be shifted to another individual or entity. The government imposes indirect taxes on goods and services. This tax is initially paid by one individual or entity, but later, the tax amount or tax burden is shifted to others.
The final consumer bears the tax burden. The burden of this tax falls on the user of the goods and services. Examples include value-added tax, sales tax, customs duty, excise duty, etc.
Differences between Direct and Indirect Taxes
| S.N. | Direct Taxes | Indirect Taxes |
|---|---|---|
| 1. | The burden of this tax cannot be transferred to others. | The burden of this tax is transferred to others. |
| 2. | This tax is levied on income and profit generation. | This tax is levied on the consumption of goods and services. |
| 3. | This tax helps to bring economic equality in the country. | This tax can lead to economic inequality in the country. |
| 4. | This tax is elastic in nature. | This tax is inelastic in nature. |
| 5. | It brings frustration to income earners. | It does not bring frustration to income earners. |
| 6. | The scope of this tax is narrow. | The scope of this tax is broad. |
| 7. | The burden of this tax is directly known when paid. | The burden of this tax is not directly known when paid. |
Principles of Taxation (Principles of Taxation)
- Principle of Equality: This principle of taxation is also known as the principle of ability. According to this principle, citizens pay taxes to the government in proportion to their income. In other words, a progressive tax is one in which the tax rate increases as the taxpayer's income increases. Progressive tax is based on the principles of equality and justice.
- Principle of Certainty: According to the principle of certainty of taxation, taxpayers should know the amount they have to pay as tax, when to pay, how to pay, and why they have to pay taxes before paying them. The matter of tax determination should not be left to the discretion of tax officials.
- Principle of Convenience: This principle states that the time and method of paying taxes should be simple and convenient for taxpayers. For example, it is easier for farmers to pay land revenue at the time of harvesting crops and for employees to pay income tax at the time of receiving salaries. It can be even more convenient to levy income tax at the source of income. It may be more convenient to pay taxes by check than in cash.
- Principle of Economy: According to this principle, the cost and time of tax collection should be minimal.
- Principle of Productivity: The tax system implemented by the government should generate sufficient revenue. Also, the tax system should encourage production.
- Principle of Elasticity: The tax system should be able to increase or decrease revenue according to the state's needs.
- Principle of Simplicity: The tax system should be simple, not overly complex, i.e., it should be understandable to the general public.
- Principle of Diversity: There should be diversity in the types of taxes. This makes it easier to bring all classes of people and all types of goods and services under the tax net.
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