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Taxation system. Introduction T ax is a compulsory contribution from the citizens of a country to the government. There is no give and take relationship in case of tax payment. Implying, a citizen of a country cannot demand a particular good or service in lieu of the tax paid by him.
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Taxation system Introduction Tax is a compulsory contribution from the citizens of a country to the government. There is no give and take relationship in case of tax payment. Implying, a citizen of a country cannot demand a particular good or service in lieu of the tax paid by him. Tax revenue of the government is an important and a major source.
Characteristics of a tax • Tax , as a source of public revenue ,is distinct from other source of public revenue. It is so because ,tax has certain unique feature: • 1). Compulsory payment:- • It is a compulsory payment. If the government imposes a tax upon a person, he has to pay it even against his will. The public has to pay a tax whenever demanded by the government.
2)no direct service:- • The tax payer does not get any direct service I • n return for a tax. • 3) no proportionate relation between the tax and the benefits:- • It is also not necessary that a tax payer gets the benefits from the government in proportion to the amount paid by him as tax. • 4) legal procedure:- • Taxes are levied according to legal procedure.
Objectives of taxation • 1) revenue generation:- • Taxation is one of the means of getting revenue. Taxation is a method by which government makes an attempt to earn the needed revenue by the levying different taxes. • 2) regulation and control of economic activities:- • Taxation also aims at regulating consumption, import, export, profit,etc. when in the social interest government wants to restrict the consumption of some goods, then their prices are hiked by levying taxes.
3) allocation of resources:- • If government wants to withdraw the resources from the production of luxuries and utilise the same for producing more of necessities, it imposes heavy taxes on luxuries and removes taxes from necessaries..as a result of more taxes on luxuries, their prices rise and demand fall. • 4) reduction of inequality:- • it reduce inequality of wealth and income. On the one hand ,by levying taxes at high rates on
Rich, government collects large income and thereby reduce their wealth and income. • On the other hand , the poor class is exempted from the payment of any income tax. • 5) control over prices:- • One of the causes of price rise is the expansion of the supply of money. Through taxes, government reduces the volume of money with the people.
Classification of taxes • Taxes imposed by the government are of different types; • 1) single and multiple taxation:- • Single tax- single tax means that only one tax should be levied in the country. For example if income tax is levied, then no other tax, like sale tax, excise duty, land tax etc. to be simultaneously levied.
Multiple tax-it is that system in which several types of taxes, such as, income tax, expenditure tax, sale tax etc. are levied simultaneously. This system is more flexible, extensive, as well as practical. • 2) proportional, progressive,regressive and degressive taxes:- • Proportional tax- it implies that the rate of tax does not change with the change in income. A fixed portion of income is levied as tax from all people.
For example, if the rate of tax is 5%, the person whose income is rs 10000 ,will pay 500 rs as tax..as against it, the person whose income is rs 20000, will pay 1000. Proportional tax Tax rate T T o Tax base
progressive tax:- it implies that the rate of tax increase with an increase in income. • Suppose a man has an income of rs 500000 per year , and he has to pay 10% tax.if his income increases to rs 800000 the rate of tax may be 15%. TT line inclines upwards. This shows that the rate of tax is increasing along with the increase in tax base. T Tax rate T O Tax base
regressive tax- it implies that the rate of tax decrease with the increase in income. The poor people have to bear more of the tax burden than the rich people do ,in this system. This system is unjust and improper. Regressive tax T Tax rate T O Tax base
TT Line implying that the rate of tax goes on decreasing as the tax base goes on increasing. • degressive tax- it is the tax in which the rate of tax begins to increase simultaneously with the increase in income. Degressive tax is a combination of the progressive tax and proportional tax.
3) ad valorem and specific taxation:- • Ad valorem – value added tax is such an indirect tax which is , imposed on value added at the various stages of production. This concept of VAT is prevalent in most of the countries.VAT is in fact a multi stage sale tax. • Value added = total sales – cost of intermediate consumption = final sales = GDP = rent + interest + profit +wages • Specific taxation system: this tax levied on the weight of the commodity. In fact when a tax is levied on a commodity on the basis of its unit ,size or weight, it is called the specific tax.
4) direct and indirect tax:- • Direct tax: a direct tax is that tax which is borne by the person on whom it is levied. • Indirect tax: when we buy a radio-set or a bicycle from the market ,we have to pay the sales tax to the shopkeeper in addition to the price of radio or cycle. The shopkeeper deposit the sale tax with the government . In this way the government collects the tax from the shopkeeper, and the shopkeeper collect it from the consumer. Thus , the buyer has to pay the tax indirectly to the government through the shopkeeper. Such taxes are called indirect taxes.
