Concept of Tax
Tax is a compulsory levy on the income of an
individual or a company. It is levied by the government to raise revenue for
the development of various sectors. The tax collected from individuals,
companies, and other entities is used by different government departments in
order to achieve their goals and objectives. Taxation plays a vital role in any
country’s economy as it helps governments to develop their own infrastructure,
provide basic amenities like education, health care, etc., and also helps them
maintain law and order among their citizens.
The term tax refers to the compulsory monetary charge
imposed by the government on its citizens and Institutions for the service
rendered in various sectors of the country. It is mandatory that nobody
can deny these payments. The taxpayer does not expect a direct benefit in
return. The amounts collected by the tax are spent for the Welfare of people.
Types of Taxes
The burden of tax at the time of payment is an initial
burden which is called impact.
The burden of tax can be shifted to another person but
some burden of tax cannot be shifted to others, it is called a real burden. The
real burden is the final resting place of tax which is called incidence. On the
basis of impact and incidence taxes are classified into the direct and indirect
tax
Direct Tax
When the impact and incidence of the tax fall on the same person on whom it is imposed legally it is called direct tax. For example, income tax, profit tax, property tax, interest tax, etc.
Features of Direct Taxes
The burden of tax cannot be shifted
The taxpayer is certain about the amount of tax and
the time of payment
The government can increase or decrease the tax at
different rates according to revenue so it is elastic in nature.
The method of direct tax is a powerful instrument to
control inflation.
Merits of Direct Taxes
It ensures equity and equality which means the higher
the level of income higher will be the tax rate.
The cost of collection of direct tax is low which
means it is economic in nature.
Direct taxpayers know the amount and time of payment
in the same way the government also knows the amount of revenue they can expect
and plan for the country's development.
Direct tax is elastic which means can be increased or
decreased with the increase or decrease in income and property.
Direct tax is progressive in the sense that a higher tax
rate is imposed on the rates and lower tax on the poor.
Demerits of Direct Taxes
It is inconvenient to mention the record of tax payments
and visit the tax office frequently.
The taxpayer can submit false data so there is the
possibility of evasion.
If the taxes are too heavy then they discourage savings
and investments, in this situation country may suffer from the business cycle. If
the taxes are progressive then rich people have to pay more so they may bring conflict
(State has to see the world by standing in the other shoes).
It has limited scope because it collects a handsome
amount of money from rich people only. It discourages the taxpayer to earn more
(working more) to pay more tax.
Indirect Tax
When the impact of the tax falls on one person and the incidence of tax is shifted to another, it is called an indirect tax. For example, value-added tax (VAT) is an indirect tax because it is paid by producers or sellers of a commodity and can be shifted to the final purchaser by adding the amount of tax with the price of that commodity.
Features of Indirect Taxes
The burden of tax can be shifted partly or wholly to another
person. The indirect tax covers both the rich and the poor. people compulsorily
pay such tax at the purchasing of goods and services. The final purchaser who
pays tax does not fill the burden. Increasing the indirect tax causes inflation.
The government revenue is uncertain because higher prices will cause a decrease
in demand.
Merits of Indirect Taxes
The indirect tax is convenient for both taxpayers and the
government. It is paid in small amounts but collected from producers in a lump
sum.
Indirect tax is received from all people of different statuses
so it has wider scope to collect government revenue.
It is non-evaded because tax is part of the price. It is elastic
in nature which means it can be increased or decreased. Government can impose
high taxes on luxurious goods and increase revenue. The collected revenue can
be utilized for the welfare of the people, i.e., free education, health care, etc.
Government can check harmful consumption such as tobacco, cigarette,
etc.
Demerits of Indirect Taxes
The rich and poor people pay the same amount of tax rate
while purchasing the same goods and services so it is regressive in nature.
Tax collection depends upon market forces such as demand and
supply so it is uncertain for the government revenue. It is uneconomic because a
large administrative staff is required to administer such taxes.
Differences Between Direct Tax and Indirect Tax
Proportional Tax
Propositional tax is used when the tax rate is constant across all income and wealth levels. Varying people may pay different amounts of tax, but the rate of taxation remains the same. Rich and poor pay the same flat fee. The tax ratio does not discriminate against anyone. Although it is fairly straightforward, a person with a low income must make more sacrifices than a wealthy person. Rich people in this scenario make fewer sacrifices than the poor even though they pay the same amount in taxes.