Tax is fees Levied on products and services by an individual, an organization, or a government to generate revenue. The amount accumulated through tax is used for executing public welfare programs. Penalty charges apply to those evading tax if a tax notice goes unacknowledged by the taxpayer, if the taxpayer provides false information regarding their income to evade tax, or those who refrain from paying tax or default on payments. There are provisions in the IPC to take strict actions against tax evaders and defaulters.
Classification of Taxes:
Taxes may be broadly classified into direct and indirect Taxes. This classification is based on the mode of payment.
- Direct taxes are those that the taxpayer pays directly to the government.
- Income tax comes under the classification of direct taxes.
- Indirect taxes are fees/charges levied on goods and services when they are bought and sold.
- The end consumer of the product/service pays the tax on the product he/she consumes to the seller of the given product/service. The seller pays the fee to the government as an indirect tax.
- Therefore, the end consumer is indirectly paying the fee to the government as an indirect tax through the medium of the seller. GST, Value Added Tax, excise duty are all examples of indirect taxes.
Types of Direct Taxes:
Types of Indirect Taxes:
Paying tax basically ensures that the government has sufficient funds to execute various public welfare programs and infrastructural improvements. Other benefits include funding for the following:
- Public welfare projects
- Public infrastructure development projects
- Public health & education
- Public utilities, including water, electricity, and sewage systems
- Public insurance
- Defence weaponry
- Scientific research
- Pension schemes
- Unemployment benefits
- State government employees’ salary
Advantages of Paying Tax:
There are several advantages of paying taxes that the taxpayer gets to enjoy. For instance, it is possible to use tax return documents of income tax as a proof document to apply for a loan/financial assistance.
- Loan approvals: While applying for bigger loans like home and vehicle loans, a copy of ITR from the previous 3 years is requested by banks. If you attach a copy of your income tax returns filing from the last 3 years, you can apply for a higher loan amount or reapply if your application got rejected the first time. The reason for this being the banks calculate your repaying ability and credit risk based on your income. ITR is a document that can be used as proof of your income to receive bigger loans quickly.
- Visa: Foreign consulates request for your ITR returns at the time of visa interview to ensure that you are not escaping your country to evade paying taxes. If you are traveling abroad, especially to countries like UK, US, Canada, Middle East and European countries, it is advisable to keep your ITR receipts with your passport.
- For self-employed/freelancers/consultants: If the annual income is above the exemptions limit, ITR receipts may be used as proof of their income for any financial/business transactions.
- Government tenders: ITR receipts are used as proof of income while applying for government tenders.
- Tax refunds: You can claim