Taxation is one of the most important concepts of modern government. The term “tax” means the amount of money charged to a person by the government. A tax is generally a financial burden or any kind of direct levy levied on a citizen by a governmental body in order to finance various public services and government spending. A tax may be a penalty, repayment or an alternative. Evasion of or refusal to pay tax, and related enforcement of tax, is punishable by criminal law. This Article discusses some basic facts about taxation.
Many taxpayers fail to appreciate the difference between direct and indirect taxes. Direct taxes, such as income, estate and corporate taxes, are usually a percentage of a taxpayers yearly income. Indirect taxes are typically a charge for services that a taxpayer performs, such as property taxes or vehicle registration. A common example of a direct tax would be sales tax. In addition, many provinces and states levy some kind of personal or business franchise tax. However, most provinces and states exempt business income or provide a non-refundable exemption.
It is often difficult for taxpayers to understand the relationship between taxes and their representation to society. A good way to understand this relationship is to consider indirect taxes: what you get back from paying taxes, and what you get back from not paying taxes. Most municipalities receive some revenue through indirect taxes, because property and casualty insurance is usually a tax paid indirectly. Property taxes are calculated by estimating the value of the property, based on a assessment. Casualty insurance is usually assessed by a private entity, and its costs are deducted from the property value, reducing the property value to the extent that it exceeds the amount of premiums paid.
While we may not always agree with the amount or frequency of taxation, many citizens realize that these practices do represent society and the tax system in general. For this reason, the majority of citizens are willing to pay reasonable amounts of indirect taxes to ensure that their tax burden is reduced as much as possible. However, even with citizens willing to pay reasonable amounts of indirect taxes, many jurisdictions experience growth in their indirect tax collections, particularly in property valuation. As a result of growth in property valuation, the tax base of municipalities increases, requiring new indirect tax collections. These new indirect tax collections can create a large gap between revenues and expenses, putting the budgets of municipalities under considerable pressure.
The relationship between direct taxes and indirect taxes is not a straightforward one. For example, if a homeowner pays property taxes, but also takes out a mortgage for additional living expenses, her income is taxed twice. This double taxation results in a situation where a homeowner receives twice the income she had previously, when she sells her house.
Effective tax planning in India requires awareness of the nuances of income tax law in different states. Taxpayers should be aware of their liability to state income tax and take steps to minimize this liability. Indian taxpayers should also be aware of their liability to federal tax. They should understand how to consult attorneys and accountants to maximize their tax benefits while minimizing their tax liabilities.