Note on Concept and Types of Tax

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CONCEPT OF TAX

Taxation is the biggest source of public revenue of the government. It may be levied on the income, property and even in the time of purchasing a commodity.

According to Prof. Dalton, “A tax is a compulsory contribution imposed by a public authority irrespective of the exact amount of service rendered to the taxpayer in return and not imposed as a penalty for any legal offense.”

According to Bastable, “Tax is a compulsory contribution to the wealth of a person for the service of the public powers.”

TYPES OFTAXES

  • Direct Tax

    Source:anooprchandra.in
    Source:anooprchandra.in

Those taxes directly imposed on individuals or firm such as income tax, land tax, registration tax etc is defined as a direct tax.

According to Dalton, “A direct tax is one, which is really paid by the person on whom it is legally imposed while an indirect tax is imposed on one person an indirect tax is imposed on one person but is paid partly or wholly by another.”

FEATURES OF DIRECT TAX

The features of direct are also the advantages and disadvantages of direct tax.

ADVANTAGESOFDIRECT TAX

Some of the advantages of direct tax are as follows:

  1. Equity

With the ability of tax payer to pay, the burden of taxation is distributed among the taxpayers in an equitable manner is imposed in direct tax. Rich people have to pay more taxes than poor people.

  1. Progressive in nature

Being progressive in nature, direct taxes are fixed. So, the rich people with higher amount have to pay high amounted tax than that of poor people with lower income. A direct tax can serve as the reducing inequalities in the distribution of income and wealth.

  1. Certainty

In the case of the direct tax, the load of a taxpayer is certain salaried person knows how much is due and when should be paid. The government also knows the amount of revenue they can accept.

  1. Elastic

A direct tax is more elastic in nature because the government can change rate of taxes according to needs. It can be easily increased by the increase of tax rate.

  1. Anti-inflationary

It is one of the powerful instrument that controls the inflation. The government charges a higher tax on income in the period of inflation. It reduces real income or purchasing power of consumer that results in the decline in disposable income.

DISADVANTAGESOFDIRECT TAX

Some of the disadvantages of direct tax are as follows:

  1. Inconvenience

As the direct tax is paid from the income of the people, they are compelled to make some deduction in their income. Therefore, the citizens might feel inconvenience from paying direct tax.

  1. Less Saving

People have to consume a part of their income for a daily life and another part id to paid to the government as the tax which causes their saving to be less.

  1. Inelastic

The government cannot be able to get the information about the growth of income of the people which would result in not being increased tax revenue although the people's incomes increase. Therefore, the direct tax is believed to have been inelastic.

  1. Arbitrary tax

Although the tax rate is fixed , there may sometimes be arbitrary tax rate due to the partiality and carelessness of the tax authorities.

  1. Public Dissatisfaction

Since the peoples pay their certain part of their income to the government they might feel dissatisfied with government. It is called public dissatisfaction.

  • Indirect Tax

    Source: ashishca.com
    Source: ashishca.com

Those taxes which are imposed on commodities are called indirect taxes. Some of the indirect taxes are sales tax, value added tax (VAT), customs duties etc.

FEATURES OF INDIRECT TAX

Features of indirect tax are merits and demerits of indirect tax .

ADVANTAGESOF INDIRECT TAX

Some of the advantages of the indirect tax are as follow:

  1. Convenient

Indirect tax is imposed on goods and services. The tax is paid during the purchase time little by little on every consumption. So, the people do not fell inconvenient additionally.

  1. Wide base

Indirect tax is imposed on production and distribution of goods as well. If the government wants to increase the tax rate, the government can receive more tax revenue by increasing the tax rate.

  1. Elastic

The government can receive more tax by making a slight change in tax rate which is imposed on goods and services. According to the need, the government can increase and decrease the tax rate.

  1. No tax evasion

Consumers pay the tax along with a price of goods that is paid. Therefore, there is a rare possibility of tax evasion.

  1. Public Welfare

If government fixes a low tax rate on goods of basic needs of human life, then there will be a low price in consumable goods. This is how the general public can be able to receive public welfare.

DISADVANTAGESOF INDIRECT TAX

Some of the disadvantages of the indirect tax are followed:

  1. Uncertainty

The government, therefore, cannot be sure on how much tax can be receive because an indirect tax is levied on the production of goods and services. Similarly, the public also has no idea of a tax that they should pay.

  1. Regressive in nature

Indirect tax is regressive in nature the because every consumer of the taxed commodity pays the same rate of either rich or poor. The real burden of tax on the poor is greater than on the rich.

  1. Tax Evasion

Real tax payers pay their tax along with the price of goods and services that they purchase, but some of the producers and sellers use to do the work of tax evasion through showing less selling quantity of goods and production of goods.

  1. Uneconomical

Indirect taxes are uneconomical because government spends more for the collection than the actual amount of taxes. The government has to give a large number of manpower to collect the tax.

  1. Inflationary

The indirect taxes create the inflationary condition. When the tax rate increases it raises the price of the commands. So, the indirect taxes lead to an unending spiral of higher price and again higher price.

(Karna, Khanal, and Chaulagain)(Khanal, Khatiwada, and Thapa)(Jha, Bhusal, and Bista)

Bibliography

Jha, P.K., et al. Economics II. Kalimati, Kathmandu: Dreamland Publication, 2011.

Karna, Dr.Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Economics. Kathmandu: Jupiter Publisher and Distributors Pvt. Ltd, 2070.

Khanal, Dr. Rajesh Keshar, et al. Economics II. Kathmandu: Januka Publication Pvt. Ltd., 2013.

  1. There are two types of tax: Direct tax and Indirect tax.
  2. Those taxes directly imposed on individuals or firm such as income tax, land tax, registration tax etc is defined as direct tax.

  3. Those taxes which are imposed on commodities indirectly like VAT, sales tax, etc are called indirect taxes. 

  4. According to Bastable, “Tax is a compulsory contribution to the wealth of a person for the service of the public powers.”
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