According to the legal and the economic definition, the tax definition is different in some ways, as economists do not consider many transfers to government as taxes. Some public-sector transfers are comparable with prices such as tuition at public universities and utility fees provided by local governments. Governments often gain capital through the “production” of money and coins through voluntary donations, fines, borrowing, and confiscation of property.
From the economists’ point of view, a tax is a non-penal but nevertheless mandatory redistribution of capital from the private to the public sector, imposed on the basis of defined requirements and without regard to particular benefits. To explore more, you can go through the article or easily connect with a highly experienced team of accountingguide.co.
Table of content
- What is tax?
- Understanding of taxes
- Modern Taxation System
- How do income taxes work?
- What are the types of taxes?
- What is payroll or workforce tax?
- Differentiation of taxpayers under Income Tax Act,1961
- Benefits of paying tax
- What are the purposes & effects?
- Advantages of Paying taxes
- What is the income tax used for?
- Penalty for not Paying taxes
- Economic effects
- Forms available in tax
- How to connect with a team?
What is Tax?
The term tax originates from the Latin term “taxo”. A tax is a compulsory fee or financial charge levied on an individual or an organization by a government to raise public works revenues. The collected amount is then used for various purposes of funds which the government spends on various programs. Failure to pay taxes or avoid contributing towards it invites punishment under the predefined rule.
Understanding of Taxes
The government typically taxes its individual and corporate citizens in order to help finance public works and services as well as to construct and maintain the infrastructures used in a country. The tax collected is used to boost the economy and all the people who work within it.
Taxes are applied in the U.S. and many other countries worldwide to any type of money a taxpayer earns. The money may be income gained from wages, capital gains from the appreciation of assets, dividends obtained as extra revenue, payment for goods and services, etc.
Know about Modern Taxation System
Governments imposed taxes in terms of money but corvée and in-kind taxation are their practical equivalent and features of conventional or pre-capitalist states. Throughout politics and economics, the system of taxation and the government’s tax spending are frequently widely debated.
How do Income taxes work?
Taxes are applied according to a number of variables, including the filing status of the taxpayer including married filing jointly, married filing separately, single filing, or household heading. What rank an individual has will make a big difference in how much they’re taxed.
A taxpayer’s source of revenue also creates a difference in taxes. It is important to understand the vocabulary of the various forms of income and other factors affecting how income is paid.
|Net Income Range (In Lakhs)||Rate of Income Tax|
|Individuals Citizens (upto 59 years of age)||Senior Citizens (60 to 80 years of age)||Super Senior Citizens (Above 80 years of age)|
|Up to 2,50,000||Nil||Nil||Nil|
|2,50,000 to 5,00,000 (only for Individual Citizens)||5%||–||Nil|
|3,00,000 to 5,00,000 (only for Senior Citizens)||Nil||5%||Nil|
|5,00,000 to 10,00,000||20%||20%||20%|
Table: Tax rates (in percentages) of individuals, senior citizens, and super citizens according to net income range.
What are the Types of Taxes?
There are two main types of taxes, which are further categorized into several other categories. The two major types include direct and indirect tax. Some of the minor cess taxes come under sub-categories that are discussed below. There are various different acts that manage these taxes within the income Tax Act.
- Indirect tax: Taxes mainly imposed on services and goods are called indirect taxes. The Seller of the service or good receives indirect taxes. The tax on the products and services is added to the price. It boosts product or service quality. There is only one indirect tax that is currently imposed by the government is the Goods and Services Tax or GST.
Sales of goods from outside a state (whether from another US state or foreign country) for delivery into the state are generally subject to sales or use tax (unless an exemption or exclusion applies). If a good is imported into a state by a purchaser that did not pay sales tax on the good, use tax may be due.
- Direct tax: The legal entity or individual is allowed to pay this tax directly to the government. Direct taxes are mainly overlooked by the Central Board of Direct taxes (CBDT). It may not be transferred to any other person or legal entity.
Sub-categories of Direct Taxes
The below-discussed are the sub-categories of Direct taxes:
- Income tax: It is the tax imposed on the taxable wages or the earnings owed directly to the government. Everyone who receives any form of income shall be liable to pay income tax.
- Capital gains: This tax is imposed on a property’s sale, or money earned from an investment. There basically two capital gains in terms of investment include short-term or long-term capital gains.
- Securities transaction tax: It is imposed on the securities trading and the stock market. It is raised on the price of the share as well as the securities that are traded on the Indian Stock Exchange (ISE).
- Prerequisite tax: This tax can be collected from different perks and benefits that are offered by an organization to its employees either it is personal or official that can be defined.
- Corporate tax: It is nothing but the income tax that is paid by a company. It depends on the different things that the income falls under.
- Other taxes:
- Property tax: This is the real estate or municipal tax. The property tax applies to residential and commercial property owners.
- Education cess: This is charged for funding the educational programs initiated and sustained by the government of India.
- Professional tax: This tax is levied for a profession or earns a salaried income like doctors, chartered accountants, and lawyers. That tax may vary from state to state.
- Stamp duty, registration fees, and transfer tax: This tax is imposed in addition to property tax at the time of purchasing property.
- Entertainment tax: It is levied on the gross collections from the earnings such as television series, exhibitions, movies, and more.
- Road and toll tax: This tax is collected for the purpose of maintenance of toll and road infrastructure.
What is payroll or workforce tax?
Many employees are paid unemployment and related taxes based on overall payroll. Such taxes can be imposed both in the country and sub-country levels. These taxes are mainly imposed on employees and usually calculated in terms of a percentage of the salaries that employers offer to their employees.
There are two main categories of payroll taxes:
- Salary deductions for an employee.
- Taxes owed by the employer based on the wages of the employee.
Differentiation of taxpayers under Income Tax Act, 1961
Income taxpayers are mainly taxed on 5 heads under Section 14 of the Income Tax Act, 1961:
- Income from salary
- Revenue benefits and earnings from a business or profession
- Income from house property
- Income from capital gains
- Income from other sources
Benefits of paying tax
Taxes are essentially the power a government works on and provides the people with public services. The advantages of paying taxes are set out below:
- Your payment of taxes means the government’s programs to all people can continue to operate without any hassles.
- The Income Tax Return records can be used to apply for a loan or credit card.
- Governments should finance better public services and facilities for their residents, which in effect helps raise their people’s living standards.
- The government has a lot of things to manage and for that it needs funds. So the funds you are giving in the form of taxes are used as military funding, construction of infrastructure, ensuring citizens’ health, administrative services, etc.
What are the purposes & effects?
Effects can be divided into two fundamental categories:
- Taxes cause an income effect because they reduce purchasing power to taxpayers
- Taxes cause a substitution effect when taxation causes a substitution between taxed goods and untaxed goods
Advantages of Paying Taxes
To file their income tax returns, it is compulsory and advantageous for someone who receives a taxable salary (which is one that meets the minimum exemption limit). That is the case even though after deductions, the tax liability is zero. However, even if your compensation is smaller than the minimum exemption cap, there are benefits to tax filing. Here are some benefits of paying the taxes on time:
- Loan Approvals
- Visa applications
- Self-employed individuals
- Government tenders
- Carrying forward of losses
- Claiming tax refunds
- High-cover life insurance
What is the income tax used for?
According to figures, about 71 percent of the total revenues of the government are collected by taxes and duties, while 9 percent come from non-tax revenues, and the remainder is provided by borrowings and other liabilities.
Penalty for not paying taxes
The government may impose varying degrees of penalties on any person or legal entity that evades tax. The fine depends on what tax group was not paid. This means that the money due as taxes should be charged and, on top of that, both the fine and its interest should be charged as the penalty.
Taxation moves capital from families or businesses to a nation’s government in terms of economics. The good taxes generally meet four major criteria and these criteria are mentioned below:
- Proportionate to incomes or abilities to pay
- Cheap to administer and collect
- Payable to taxpayers at times and in an appropriate ways, and
- Certain rather than arbitrary.
Forms available in tax
A vital form of taxation in the monetary economies prior to fiat banking was seigniorage, the tax can be collected on money production. Other obsolete forms of taxation include Scutage, Tallage, Tithe, Danegeld, Carucage, Tax farming, socage, Burgage.
How to connect with a team?
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