Tax refers to a compulsory contribution to state revenue, levied by the government on workers' income and business profits or added to the cost of some goods, services and transactions.
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.Summary of definition: * It is invisible paying as all people of state pay taxes in different ways like levies.
* It is compulsory to them who are eligible for direct tax. * It is used for purpose to common benefits of the country.Classification of Taxes Modern Tax systems comprise of many types of taxes. Proper classification of the sundry taxes is essential to understand the nature and significance of different taxes. Usually, taxes are classified on the basis of form, nature, aim and methods of taxation. The following classifications are common in all modern tax systems:Direct tax and Indirect tax are defined by different economists and experts on public finance in different ways, based on different criteria like based on ‘shifting of tax, based on ‘the intention of the legislature or government’, based on the relation between the tax payer and the revenue authorities and based on the timing of appraising or striking the income of the tax payer.
The most practical and convenient way to distinguish between direct and indirect taxes which are in conformity with “generally accepted view” of direct and indirect taxes. Corporation tax which is directly paid to the state may be called as direct taxes. On the other hand, taxes which affect the income and property of persons through their consumptions may be called as direct taxes. Thus, customs and excise duties, sales tax fall under the category of indirect taxes.
Specific duties: Specific duties are based on specific characteristics or measures or qualities of goods. Advalorem duties are base on the value of goods. Specific duties are levied on the basis of physical attributes like length, weight, volume, etc., of the commodities. Specific duties are simple, easy to estimate and administer. As a result, most of the goods were taxed on the basis of specific duties till recently.
Ad-valorem duties:The Latin word ‘Advalorem’ means ‘according to value’. Advalorem duty is a duty expressed as percentage of the value of the commodity. It is levied on the value of the goods. Advalorem duties result in higher tax revenue with increase in volume as well as price of goods.
Proportional Taxation: It is a tax system in which the tax rate remains constant irrespective changed in the ‘Tax Base’. Here tax is at a uniform rate and Ta payable is steady. So, in this method the rate of tax increases with increase in the income. The applicable rate depends upon the income level of individuals. Regressive Taxation: It is one where the rate of tax decreases as the tax base increases. So, the rate of tax decreases for higher incomes.
Degressive Taxation: It is one where the rate of tax increases upto a certain limit and after that the rate of tax is constant for further increases in income. This system may be called as a mixture of proportional and progressive tax systems. Single and Multiple Tax Systems:Single tax System: 'Single Tax' means only one kind of tax. It implies tax on only one thing or one class of things or one class of people. The tax may be collected regularly at periodic intervals.
Multiple Tax system: Multiple tax system means a tax system comprising several types of tax. They may include both direct and indirect taxes. In such a system, every class of citizen may be called upon to “contribute his mite” towards State revenues.
