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Taxes are the basic source of revenue/income for any government.
I can't see any government that does not need to levy taxes!
The government has the responsibility to look after the
key areas of a country like administration, security, law
and order, infrastructure, food security, etc. It also has
the responsibility of managing growth and development of
the economic resources. Primary education, healthcare and
equitable income distribution are some of the major priorities
of the government. To meet such obligations resources are
required. Taxes form the bulk of such resources. Taxes can
be direct or indirect.
Direct taxes include income tax and wealth tax that are
direct taxes levied on the basis of a person's income and
wealth. Under this method of taxation, higher income-earners
pay higher taxes. Gift tax is levied on certain gifts made
with a motive to save taxes by shifting incomes from a person
with a higher income to a person having no income. In such
cases, no real intent of charity or good cause can be established.Indirect taxes include customs duties, excise duties, Value
Added Tax (VAT) (earlier known as local sales tax), service
tax, octroi and entry tax, to mention a few. Under this
method, taxes are charged on the basis of usage. The users
pay the taxes irrespective of their incomes. No differentiation
is made between higher income and lower income groups.
Normally, both methods of taxation are employed in order
to distribute the burden of taxes equitably. Where the tax
burden is not distributed in a fair manner, tax evasion
is resorted to by the society. Thus, modern societies strike
a delicate balance between direct and indirect taxes. In
India, for example, the ratio between direct and indirect
taxes stands at 45 to 55.Modern tax administrators prefer to rely more on having
a simple tax system and moderate tax rates to garner more
tax revenues. Modern governments encourage voluntary compliance
through the above policy. Their earlier approach of having
high tax rates coupled with large incentives was found to
increase tax administration costs and complicate the tax
system. The current philosophy is to have stable tax rates
and transparent laws. The current emphasis is on `trust'
placed on tax-payers and shifting the responsibility for
correct declaration of the incomes to the tax-payers. Tax
vigilance is strengthened to detect willful defaulters.
Tax defaulters face heavy penalties. The new approach has
been a welcome step and has resulted tremendous growth in
tax revenues on the one hand and reduction in the cost of
tax administration on the other. At one point in time, the
maximum income tax rates were 70% in case of high income
individuals. The current maximum rate has been reduced to
30%.
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