What Is Tax?
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What is Tax
The term “tax” has been derived from the French word “Taxe” and etymologically, the Latin word “Taxare” is related to the term “Tax”, which means “To charge”. Tax is a contribution exacted by the state. It is a non-panel but compulsory and unrequited transfer of resources from private sector to public sector, levied on the basis of predetermined criteria.
According to Article 152 (1) of constitution of Bangladesh, taxation includes the imposition of any tax, rate, duty or impost, whether general, local or special and tax shall be construed accordingly.
Taxes are most important source of revenue of modern governments. It is a compulsory levy, to be paid by the citizens who are liable to pay it, imposed by the government.
Types of Taxes
Taxes have been variously classified by different economists. The classifications have been made on different basis, which are-
Classification on the basis of number of Taxes.
Classification on the basis of impact and incidence of tax.
Classification o the basis of structure of tax rate.
Classification on the basis of subject matter of taxation.
Classification on the basis of elasticity of tax.
Classification on the basis of tax base.
Classification according to change in government revenue: [Musgrave and Musgrave, 1989, pp216-217]
Classification according to taxing authority.
The descriptions of different types of taxes are given below:
Classification on the basis of number of Taxes:
Single Tax: When the tax system of a country incorporates only one tax, it is called single tax. In ancient times tax was levied on person as poll tax or head tax.
Multiple Taxes: When the tax system comprises different types of tax, it is called multiple taxes. At present, all the countries in the world follow multiple tax system.
There are some Merits and Demerits of Single and Multiple Tax. These are given below:
Merits of Single Tax
The single tax can be adjusted to the needs of the government.
In single tax system every member of the society contributes to the upkeep of the government.
A single tax is almost neutral from allocation effects.
Demerits of Single Tax
Because of inequality in income single tax becomes a burden for the poor families.
Single tax collects fewer amounts of revenues, whereas government income is increasing day by day.
Only one tax is charge irrespective of income class, that is poorer and richer both have to pay equal amount of tax which is completely irrational in todays economic condition.
Single tax was practiced in ancient period. It is not applicable in todays dynamic economy.
The requirement of every members of the society is not same. This is why an equal absolute reduction in the disposable income of every tax payer would hurt the poorer section more than the richer section.
Merits of Multiple Tax
It is modern practice. It is more effective in the present dynamic economic condition.
Larger amount of revenue can be collected from multiple tax system.
Classification on the basis of impact and incidence of tax:
Direct tax: Direct taxes are such kind of taxes which are paid entirely by those persons on whom they are imposed. The burden cannot be shifted to others in case of direct tax. Example includes- income tax and revenue tax etc.
Indirect tax: Indirect taxes are those taxes which are imposed on sales or purchase of any goods or services other than personal services. Here the burden is ultimately shifted to others. Example includes- VAT, customs duty etc.
There are some merits and demerits of direct and indirect taxes. These are given below-
Tax
Merits
Demerits
Direct
Equitable since they are progressive in their rates.
Economical since the administrative cost of collecting these taxes is low.
Elastic since they can be adjusted as per the needs of the state.
Certain since both the tax payer and tax authority are certain about the arte, amount and time regarding tax collection.
Direct tax ensures distributive justice since rich people pay more tax and the poor less.
It creates civic consciousness among tax payers.
Since the amount is directly paid to the treasury, there is no scope for any leakage.
Large scale tax evasion by dishonest tax payers using loopholes of the tax system.
Since the burden can not be shifted, they are unpopular.
Direct taxes are found to be arbitrary to determine the degree of progression in taxation.
Since the tax payers need to follow certain complex steps like filling returns, it is inconvenient.
Collection is not sati factory if the system is not strong enough.
Indirect
They are convenient to pay since taxes are included in price.
They are generally difficult to be evaded as they are included in the price of the goods.
Highly revenue productive in a developing country since income level of the average people is low.
By taxing luxury goods heavily equitability can be ensured.