What is Tax

A tax is a levy or any form of financial charge or fee, which is imposed by different central or state governments on legal entities or individuals. Taxes can also be imposed by local authorities like counties, municipal bodies, local governments or provinces.

The rules and regulations of taxation are a bit complicated in nature and they are different from one country to another. In the United States, the Internal Revenue Services or IRS is the government agency that performs the tax collection services for the country.

Partial payment or non-payment of taxes results in civil penalties, for example fines or confiscation of assets, or criminal penalties such as imprisonment.

Taxes are a major source of income for any country, and they can be broadly categorized into two types: direct tax and indirect tax.

The taxation framework of a particular country contributes to the economy and finance of that country to a significant extent.

Taxes are imposed for these four important needs:

  • Revenue: Revenue is the principal need for taxation. The money collected in the process of taxation is spent for public utility investments and building social infrastructure.
  • Redistribution: This refers to a balanced distribution of wealth among all sections of the society.
  • Repricing: Tax is imposed to control the consumption of harmful substances like tobacco and alcohol.
  • Representation: Taxation represents accountability and improved governance.

The four needs, or purposes, of taxation are collectively known as the four “R”s. The taxation law decides to whom a tax should be imposed, or who should bear the tax burden. The tax rate is the percentage on which a tax is imposed.

Taxes can be categorized into various types and they include the following:

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