Importance of Tax, Types and Objectives of Tax

There are many responsibilities of state to its countrymen. State is represented

by the government. Hence, the government of any country performs a number of
activities in order to maintain law and order, peace and security, satisfying with
the requirement of basic needs and public utilities etc. It also initiates various
development programmes and maintains diplomatic and friendly relation with
other nations in the world. In order to carry out all these activities and discharge
its overall responsibilities towards the people, it needs sufficient revenue. Such a
revenue is known as government revenue. It is also known as public revenue.
Government revenue is collected through various sources according to the
provisions of the financial acts and rules and regulations.
Such sources of revenue are taxes, fees and charges, fines and penalties, foreign
grants etc. Among them, tax is the main sources of collecting the government
revenue.
The concept of tax was initiated from Great Britain in 1799 to collect revenue for
the government to manage the war against France. It didn't come into practice
after that for a long time. Income tax system was regularly begun from 1840
onwards in different countries in the world. It was begun from 1840 in
Switzerland, 1849 in Austria, 1860 in England and India, 1862 in USA, 1864 in
Italy and 1959 in Nepal as a regular source of government revenue.
What are the essentials of Tax?
A tax is a compulsory contribution of a person or entity to the state as per
the rules.
The tax payer does not receive direct and or special benefit in return.
It is spent by the government for the common interest and benefit of the
people.
It is paid only by those persons and entities who earns income exceeding a
certain specified limit.
What are the Different Types of Tax with Examples?
Taxes may be categorized into different as their nature as direct taxes, indirect
taxes, progressive taxes, regressive taxes etc.
Direct Tax
A direct tax is the one, which is paid by the person or entity on whom it is legally
imposed. It is collected from the persons or entities on the income they have
earned exceeding a certain specified limit. Tax is generally calculated at a certain
percentage on the income. Income tax, corporate tax, land revenue tax etc. are
the examples of direct tax.
Indirect Tax
An indirect tax is the one, which is imposed to one person or entity but paid
partly or fully by others. It is transferable to others. The tax is collected from
customers by including it in the price of the goods or services they have
purchased. The producers collect such a tax from wholesalers the wholesalers
from retailers and the retailers from the final consumers. Excise duty, custom
duty, VAT etc. are some of the examples of indirect tax.
Personal income Tax
Personal income tax refers to the tax imposed on individuals or families who earn
income exceeding a certain specified limit subject to change as per the
provisions made in financial rules and regulations.

Corporate Tax
Corporate tax is the tax imposed on the incomes of a business entity. It
occupies the most part of the government revenue collected from taxes.
Corporate tax rates are generally applied in flat system with high rate of large
undertakings and low rates for smaller ones. The small and large undertakings
are categorizing as per the size of the activities.
Excise duty
Excise duty is the tax levied on luxurious products. It is intended to discourage
the consumption of harmful products on one side and to collect government
revenue in considerable extent on the other side.
Custom Duty
Custom duty is the tax charged on the goods dealt in the foreign trade especially
on the imported goods to encourage and promote export and to protect national
industries. Government simply gives exemption of this tax on export trade and
imposes on import trade. Custom duty may be export duty or import duty as its
nature and imposed to the trading goods.
Land revenue Tax
Land revenue tax is the one, which is imposed to the landlords on the revenue
generated from land especially while selling or purchasing land.
Value Added Tax (VAT)
Value added tax is the tax levied on value added on the price of the product at
each stage of production, and or distribution activities. Value added is the
difference between sales values and purchase value or the conversion cost plus
profit. Conversion cost means the expenses on rent, depreciation, maintenance,
insurance, salary etc. It is imposed on the goods at import, production and
selling stages.
What are the objectives of Tax?
The concept of tax was initiated with a view to generate government revenue in
its very beginning stage. In course of time it has been utilized for various
purposes.
To raise government revenue for development and welfare programmes in
the country.
To maintain economic equalities by imposing tax to the income earners
and improving the economic condition of the general people.
To encourage the production and distribution of the products of basic
needs and discourage the production and harmful ones.
To discourage import trade and protect the national industries.
What are the Importance of Tax?
Tax is a major source of government revenue and its contributes for the overall
development and prosperity of a country.
Raising government revenue in terms of income tax, custom duty, excise
duty, entertainment tax, VAT, land revenue tax etc. from various sectors in
order to initiate development and welfare programmes.
Maintaining economic stability by reducing economic inequalities by
means of equitable distribution of wealth by way of imposing tax to the
income earners and improving the economic condition of the general
people.

Regulating the economic sectors into right direction by encouraging the

production and distribution of useful goods and discouraging the harmful
products by imposing high tax rate on them.
Building and strengthening the national economy by encouraging and
protecting national industries and promoting export trade.
Reducing regional economic disparity by encouraging the entrepreneurs to
establish industries in remote and backward regions by giving tax
exemptions, rebates and concessions etc.

What are common reasons for governments to implement tariffs?

A tariff is a tax imposed by a governing authority on goods or services entering
or leaving the country and is typically focused on a specified industry or product.
It is meant to alter the balance between the tariff-imposing country and its
international trading partners. For example, when a government imposes an
import tariff, it adds to the cost of importing the specified goods or services. The
additional marginal cost added by the tariff discourages imports, thus affecting
the balance of trade.
There are various reasons a government may choose to impose a tariff. The most
common examples of the rationale used to justify tariffs are protection for
nascent industries, national defence purposes, supporting domestic employment,
combating aggressive trade policies and environmental reasons.
Infant Industries
Tariffs are commonly used to protect an early-stage domestic industry from
international competition. The tariff acts as an incubator that, in theory, should
allow the domestic industry ample time to develop and grow into a competitive
position on an international landscape.
National Defence
If a particular segment of the economy provides critical products with respect to
national defence, a government may impose tariffs on international competition
to support and secure domestic production in the event of a conflict.
Domestic Employment
It is common for government economic policies to focus on creating an
environment where constituents have robust employment opportunities. If a
domestic segment or industry is struggling to compete against international
competitors, the government may use tariffs to discourage consumption of
imports and encourage consumption of domestic goods in hopes of supporting
associated job growth.
Aggressive Trade Practices
International competitors may employ aggressive trade tactics such as flooding
the market in an attempt to gain market share to put domestic producers out of

business. Governments may use tariffs to mitigate the effects of foreign entities
employing what may be considered unfair tactics.
Environmental Concerns
Governments may use tariffs to diminish consumption of international goods that
do not adhere to certain environmental standards.

What is an 'Income Tax'

An income tax is a tax that governments impose on financial income generated
by all entities within their jurisdiction. By law, businesses and individuals must
file an income tax return every year to determine whether they owe any taxes or
are eligible for a tax refund. Income tax is a key source of funds that the
government uses to fund its activities and serve the public.
What is a 'Sales Tax'
A sales tax is a consumption tax imposed by the government on the sale
of goods and services. A conventional sales tax is levied at the point of sale,
collected by the retailer and passed on to the government. A business is liable
for sales taxes in a given jurisdiction if it has a nexus there, which can be a brickand-mortar location, an employee, an affiliate, or some other presence,
depending on the laws in that jurisdiction.
What is a 'Value-Added Tax - VAT'
A value-added tax (VAT) is a type of consumption tax that is placed on a product
whenever value is added at a stage of production and at final sale. VAT is most
often used in the European Union. The amount of VAT that the user pays is the
cost of the product, less any of the costs of materials used in the product that
have already been taxed.
For example, when a television is built by a company in Europe, the
manufacturer is charged VAT on all of the supplies it purchases to produce the
television. Once the television reaches the shelf, the consumer who purchases it
must pay the applicable VAT.
What is 'Property Tax'
Property tax is a tax assessed on real estate. The tax is usually based on the
value of the property (including the land) you own and is often assessed by local
or municipal governments.
Definition of 'Service Tax'

Definition: Service tax is a tax levied by the government on service providers

on certain service transactions, but is actually borne by the customers. It is
categorized under Indirect Tax and came into existence under the Finance Act,
1994.
What is a 'Gift Tax'
A gift tax is a federal tax applied to an individual giving anything of value to
another person. For something to be considered a gift, the receiving party cannot
pay the giver full value for the gift, but may pay an amount less than its full
value. It is the giver of the gift who is required to pay the gift tax. The receiver of
the gift may pay the gift tax, or a percentage of it, on the giver's behalf in the
event that the giver has exceeded his/her annual personal gift tax deduction
limit.