Introduction to Taxation

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  • Topic: Tax, Taxation, Indirect tax
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  • Published : February 14, 2014
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Subject: Taxation

Topic: Advantages Of Direct Taxes
&
Impacts Of Indirect Taxes on
Corporate sector

By: Vrushika Sheth

Introduction on Tax

To tax (from the Latin taxo; "I estimate") is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many administrative divisions. Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent (often but not always unpaid labour).

A tax is a "pecuniary burden laid upon individuals or property owners to support the government. A payment exacted by legislative authority." A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government whether under the name of toll, tribute, tall age, gable, impost, duty, custom, excise, subsidy, aid, supply, or other name."

A fee charged ("levied") by a government on a product, income, or activity. If tax is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on the price of a good or service, then it is called an indirect tax. The purpose of taxation is to finance government expenditure. One of the most important uses of taxes is to finance public goods and services, such as street lighting and street cleaning. Since public goods and services do not allow a non-payer to be excluded, or allow exclusion by a consumer, there cannot be a market in the good or service, and so they need to be provided by the government or a quasi-government agency, which tend to finance themselves largely through taxes.

Basically, tax can be classified into two broad categories:
1. Direct Tax
2. Indirect Tax

1. Direct Tax
A direct tax is a tax paid by a person on whom it is legally imposed. In direct tax, the person paying and bearing tax is the same. It is the tax on income and property. Examples of direct taxes are: * Income Tax

* Vehicle Tax
* Expenditure Tax
* Property Tax
* Interest Tax
* Gift Tax etc.

2. Indirect Tax
An indirect tax is a tax imposed on one person but partly or wholly paid by another. In indirect tax, the person paying and bearing tax is different. It is the tax on consumption or expenditures. Examples of indirect taxes are: * VAT

*Entertainment Tax
* Excise Duty
* Sales Tax
* Hotel Tax
* Import and Export Duty etc.

Merits of Direct Taxes

1. Equity
There is social justice in the allocation of tax burden in case of direct taxes as they are based on the principle of ability to pay. Persons in a similar economic situation are taxed at the same rate. Persons with different economic standing are taxed at a different rate. Hence, there is both horizontal and vertical equity under direct taxation. Progressive direct taxation can reduce income inequalities and bring about adequate social & economic justice.For example, in the Indian Budget of 2007, individual with an income of upto Rs. 1, 10,000 are exempted from payment of income tax and in the case of women tax payer, the exemption limit is Rs. 1, 45,000. 2. Certainty

As far as direct taxes are concerned, the tax payer is certain as to how much he is expected to pay, as the tax rates are decided in advance. The Government can also estimate the tax revenue from direct taxes with a fair accuracy. Accordingly, the Government can make adjustments in its income and expenditure. 3. Relatively Elastic

The direct taxes are relatively elastic. With an increase in income and wealth of individuals and companies, the yield from direct taxes will also increase. Elasticity also implies that the government's revenue can...
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