Tax is defined as a fee imposed to be paid by individuals or corporations and is legally enforced by a government body at local, regional or national levels to financially aid several nation-building activities.

Tax is one of the most common financial terms. Taxes are one of the primary sources of income for the government through which it fulfils various projects and initiatives. They are levied by the central and state governments. Read on to know about the various aspects of tax.

Purpose of tax
Tax serves several purposes and is vital for the country’s economic progress, sustenance and development. While the tax money is utilised for fulfilling various projects, it’s also the primary source of funding for several important government welfare schemes. 

Taxes also help to reduce economic inequality in society through redistribution of wealth. It helps the government to build roads, schools, health care institutes and finance law enforcement and the judicial system. The Indian Constitution under Article 246 enlists different taxations in the country between the Centre and the State. 

Classification of taxes

In India, taxes can broadly be classified into two different categories:

1. Direct taxes
These taxes are paid directly by the citizen to the government and cannot be remitted to others.  In India, the Central Board of Direct Taxes or CBDT is the governing authority on direct taxes. The most common examples of direct taxes are income tax, property tax, personal property taxes and taxes on assets.These taxes are based on the ability-to-pay principle. It is a kind of disincentive as it leads to people working hard more and earning more money, because the more money a person earns, the more taxes he is likely to pay.

2. Indirect taxes
These taxes are collected by the producer or retailer from the supply chain and is paid to the government. These taxes are generally levied on goods and services. The Central Board of Indirect Taxes and Customer (CBIC) is the governing authority on indirect taxes.In India, the Goods and Services Tax (GST) is the most common example of indirect tax. Before the implementation of the GST, there were several indirect taxes such as Octroi, Value Added Tax (VAT), Entertainment Tax, Entry Tax, Luxury Tax, etc. However, these taxes are now all subsumed under GST. In other words, GST has replaced all these taxes now.

Taxes have a long history and are one of the main instruments of the Government to develop the economy. Both direct and indirect taxes have the same objective, though they are collected differently. It’s the duty of every citizen of the country to pay taxes responsibly for the purpose of nation building.

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