Taxation – Definition, What is Taxation?

What is Taxation?

I am sure you must have often heard the term “tax” but have you ever wondered what is taxation? Where is this term arrived from? What is taxation meaning? Well, the term “tax” originates from the Latin word “Taxo,” meaning to levy charges or impose fees. Tax is a mandatory financial obligation enforced by governmental authorities, requiring honest payment from every citizen. It can be applied to various aspects such as income, property, profits, services and even purchases.

Taxation meaning is the process by which a governing body, typically a government, imposes a compulsory financial responsibility on its populace or inhabitants. Throughout history, the payment of taxes to governmental entities or representatives has remained an enduring fixture of civilization. The concept of taxation encompasses various forms of obligatory assessments, encompassing income, capital gains, and estate taxes, among others. While “taxation” can function as both a noun and a verb, it commonly denotes an action, with the resultant income typically referred to as “taxes.”

Understanding Taxation System

Many economists like Adam Smith, Taylor, Bastable, Seligman, Taussing, Dalton, etc. have tried to define tax in different ways. Adam Smith defines tax as “a tax is a contribution from citizens for the support of the state.” While Prof. Bastable defines tax as “a tax is compulsory contribution of the wealth of a person or body of persons for the services of public powers.”

The introduction of tax is to be distinguished from other forms of payment, like voluntary market exchanges, by its non-consensual nature and lack of direct correlation to specific services provided. The government imposes taxation through the implicit or explicit use of coercion. While taxation shares similarities with extortion or protection rackets, it is legally distinct due to its enforcement by a governing body rather than private entities.

Tax systems have exhibited significant variation across jurisdictions and historical periods. In contemporary societies, taxes are levied on tangible assets such as property and specific occurrences like sales transactions. The formulation of tax policies stands as one of the most crucial and contentious matters in modern political discourse.

Understanding Indian Taxation System and its Types

The Indian taxation system is a multifaceted framework that oversees the gathering and handling of taxes in India. It encompasses diverse taxes imposed by the central government, state governments and local authorities. Here’s an overview of the primary elements of the Indian taxation system.

1. Direct Taxes: Direct taxes are levied on individuals and entities based on income and profits. There are two primary types of taxes in India:

a. Income Tax: It is a tax imposed on the income earned by individuals, Hindu Undivided Families (HUFs), partnerships, companies and other entities. The income tax rates vary based on income slabs and the taxpayer’s category.
b. Corporate Tax: Companies are subject to corporate tax which is levied on their profits. The tax rates for domestic and foreign companies are different, and they may vary from year to year.

2. Indirect Taxes: Indirect taxes are levied on the manufacture, sale and provision of goods and services. They are collected by intermediaries and passed on to the end consumers. The major types of indirect taxes in India are:

a. Goods and Services Tax (GST): GST is a comprehensive indirect tax that is levied by multiple central and state taxes. It is levied on the supply of goods and services at each stage of the supply chain. GST rates are categorized into different slabs, such as 5%, 12%, 18% and 28%, based on the nature of goods and services.
b. Customs Duty: It is imposed on goods imported into or exported out of India. It includes basic customs duty, additional customs duty (countervailing duty) and special additional duty. The rates vary based on the type of goods and the country of origin or destination.

3. Other Taxes and Levies: Apart from direct and indirect taxes, the Indian taxation system includes various other taxes and levies, such as:

a. Wealth Tax: Wealth tax is no longer applicable in India. It was a tax imposed on individuals and HUFs based on their net wealth.
b. Securities Transaction Tax (STT): STT is a type of tax which is levied on the purchase and sale of securities listed on recognised stock exchanges in India.
c. Property Tax: Property tax is imposed by local authorities (municipalities, panchayats, etc.) on the ownership or occupation of the property.
d. Excise Duty: Excise duty is levied on the manufacture of goods in India. However, with the implementation of GST, most excise duties have been subsumed under GST.

Purpose of Taxation

Taxation meaning is to levy and collect mandatory contributions from individuals and businesses to the government to fund public expenditures and services. Taxation serves as a fundamental tool to finance government expenditures and its rationale has evolved. Initially, taxes were implemented to support ruling classes, raise military forces and fortify defenses. The authority to impose taxes is often derived from divine or supranational rights.

Subsequently, diverse justifications for taxes emerged based on utilitarian, economic and moral considerations. Supporters of progressive taxation on high-income earners argue that taxes foster a more equitable society. Increased taxes on specific goods and services like tobacco or gasoline are justified as discouraging consumption. Proponents of the public goods theory contend that taxes are necessary when the private provision of public goods, such as lighthouses or national defense, is deemed suboptimal.

Why We Need To Pay Tax?

Taxation has been an enduring aspect of human civilization, echoed by the adage that “death and taxes” are life’s certainties. From ancient times to the present day, taxes serve as a vital means for governments to finance public works, infrastructure projects, and military endeavours. In contemporary society, taxpayer funds continue to be allocated to diverse initiatives of similar nature.

Conclusion

In conclusion, taxation is an integral part of society, with a rich historical background. It serves as a mechanism for governments to secure funding for public projects and services. From ancient civilizations to the present day, taxes have played a crucial role in supporting infrastructure development, public works and national defense.

Today, taxpayer dollars continue to be used to finance a wide range of initiatives aimed at promoting societal welfare and economic growth. Understanding taxation is essential for comprehending the functioning of governments and the collective responsibilities we share as citizens. To learn more our accounting and taxation course is just what you need.