Taxes

Meaning of Tax

A tax is a mandatory fee or financial charge levied by any government on an individual or an organization to collect revenue for public works providing the best facilities and infrastructure.

Taxes serve the following purposes:

1. Revenue Generation: Governments use tax revenue to fund public services and programs, such as education, healthcare, infrastructure, defense, and social welfare.

2. Redistribution: Taxes can be used to redistribute wealth and reduce income inequality. Progressive tax systems, where higher-income individuals pay a larger percentage of their income in taxes, aim to create a more equitable distribution of wealth.

3. Regulation: Control behaviours (e.g., on harmful substances). For example, governments may implement taxes to discourage certain behaviours or activities, such as taxes on tobacco and alcohol to reduce consumption.

4. Economic Management: Governments can use fiscal policy, including taxation, to stimulate economic growth during periods of recession or cool down an overheated economy during periods of inflation. For instance, cutting taxes during an economic downturn can boost consumer spending and business investment.

5. Public Goods: Fund essential services and infrastructure. These include infrastructure projects like roads and bridges, public schools, healthcare, and law enforcement.

6. Behavioural Influence: Encourage desired actions. For example, tax incentives may be provided to encourage individuals and businesses to engage in specific activities, such as investing in renewable energy or conducting research and development.

7. Budgetary Control: Manage government finances, helping governments manage their finances and ensure that expenditures align with revenue.

Various terms related to taxes

1. Ad Valorem taxes

Ad valorem taxes are taxes levied as a percentage of the assessed value of a good or service. The term “ad valorem” is Latin for “according to value.” These taxes are calculated based on the value of the item being taxed, such as property, imports, or sales.

Common examples of ad valorem taxes include:

• • Property Taxes: Assessed on the value of real estate or personal property.
  • GST: Applied as a percentage of the sale price of goods or services.
  • Customs Duties: Levied on the value of imported goods.
  • Vehicle Taxes: Based on the assessed value of a vehicle.

2. Specific taxes

They refer to taxes that are imposed at a fixed amount or rate per unit of a particular item, rather than being based on the item’s value. These taxes are specific to certain goods or services and are not proportional to their price. For example: Excise Tax.

Cess and Surcharge

a) Cess: Cess refers to a tax imposed for a specific purpose. It is usually levied to fund particular projects or initiatives, such as education, health, or disaster relief. Eg- Education cess, Swachh Bharat Cess, Krishi Kalyan Cess

b) Surcharge: Surcharge is an additional charge or tax imposed on the existing tax liability. It is calculated as a percentage of the original tax amount.