Question

What is the need of collecting tax? Classify taxes into its two major categories and explain each briefly.

Answer 1

• A democratic country has to incur expenditures on a variety of activities that ‘ it does in the country. Also, a developing economy makes investment in raising and maintaining several public utilities. To meet all these expenditures a state (government) must raise incomes.
• Taxes are an important source.of revenue/income for a state (government).

Taxes can be broadly divided into two categories:

1. Direct taxes and
2. Indirect taxes.

1. Direct taxes:

• When the taxpayer ‘directly pays the taxes’ to the government, the tax is called a direct tax.
• A direct tax is applied on individuals and organizations directly by the government.
• Income tax, corporation tax, wealth tax, etc. are examples of direct taxes.

2. Indirect taxes:

• The taxes applied on the manufacture or sale of goods and services are called indirect taxes.
• The tax payer does not pay this tax directly to the government. These taxes are initially paid to the government by an intermediary. The intermediary then adds the amount of the tax it paid to the value of the goods /services and passes on the total amount to the end user.
• Sales tax, service tax, excise duty, GST, etc. are examples of indirect taxes.