Financial Planning

Savings and Investment

Everyone must have heard the word 'tax' in newspapers, news channels or in people's conversation.
What exactly is tax and why do we pay it? Why do the government collects taxes from us?

Tax is actually the amount of money charged by the government from the common people and other various entities to meet the expenditure required for public welfare such as street lightning, street cleaning, water supply and building of roads. It is also charged on products, incomes and other activities.

There are two types of taxes. They are:
(1) Direct tax
(2) Indirect tax

Let us try to understand these types of taxes.

(1) Direct tax:
The tax which is paid directly to the government by an individual or by an entity upon whom the tax is imposed is called direct tax. Direct taxes include property tax, income tax, water tax, professional tax, taxes on assets, etc.
The burden of direct taxes cannot be shifted to another individual or entity. Only the individual or the entity upon whom the tax is imposed is responsible for the payment of tax.

(2) Indirect tax:
The tax which is not paid directly to the government is called indirect tax. It actually increases the price of a commodity, so the consumer pays the tax indirectly to the government by paying more for the commodity. Indirect taxes can be shifted to other individuals, so it is not necessary that only the individual responsible for the payment of tax should fulfil its responsibility; rather, he/she can shift his taxes to someone.
Some examples of indirect taxes are excise tax, custom duty and sales tax.

Let us discuss some direct or indirect taxes in detail.

(i) Excise tax: 
This is an indirect tax which is charged by the government from the producers of the goods manufactured for sale within the country. It is actually an interstate tax. It is considered as an indirect tax as the producer who pays the tax to the government tries to recover the tax from the consumer by increasing the price. It is generally imposed along with some other indirect taxes. 
Example: Tax imposed on tobacco, alcohol, gasoline and highway usage of trucks.

(ii) Service tax: 
This is an indirect tax which is charged by a service provider from the users. It is eventually paid to the government.
The tax charged in hotels, restaurants, bars, cinema halls, telephone bills, etc., for the services provided are service tax.

(iii) Income tax: 
This is a direct tax. It is paid by every individual who earns more than a minimum fixed amount set by the government of a country. This is the biggest and the most important source of income for the government.

(iv) Sales tax: 
This is an indirect tax which is charged by the government on the sales made b…