Definition of Tax

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Definition of Tax ; The word ‘tax’ has been derived from the French word ‘taxe’ and the Latin word ‘taxare’ which means ‘to charge’. Tax is a contribution exacted by the state. It is a non-penal but compulsory and unrequited transfer of resources from the private to the public sector, levied on the basis of predetermined criteria. According to P. E. Taylor, “ Taxes are compulsory payment to government without expectation of direct return in benefit to the taxpayer. According to Section 2(62) of the Income Tax Ordinance 1984, “ Tax means the income tax payable under this ordinance and includes any additional tax, excess profit tax, penalty, interest, fees or other charges leviable or payable under the ordinance” Characteristics of Tax

* Compulsory payment to the government
* Imposed by the government
* Tax finances the government expenditure
* It is one of the prime sources of revenue for the government * It is not a fine or penalty
* It is paid by the taxpayer without expectation of any direct return from the government Purposes or Objectives of Taxation
* Revenue collection
* Reduction of inequalities in income and wealth
* Accelerating economic growth
* Control of consumption
* Protection of local industries
* Economic development
Role of Tax in Economic Development
* Optimum allocation of available resources: Imposition of tax leads to diversion of resources from the taxed to the non-taxed sector. This revenue is allocated on various productive sectors with a view to increasing the overall growth of the country. Tax revenues may be used in less developed areas of the country. * Reduction of inequalities in income and wealth: Efficient tax system can reduce inequalities in income and wealth. * Accelerating economic growth: Tax policy can be used to handle critical economic situations like depression and inflation. In depression, tax policy is designed to increase consumption and thus to increase the aggregate demand. Tax policy may be used to strengthen incentives to savings and investment. * Raising government revenue: Government need financial resources to meet administrative expenses, to maintain law and order, to ensure social welfare etc. Increase in tax collection can ensure sufficient resources to such expenditures of the government. * Control mechanism: Tax policy can be used as a control mechanism to check inflation, to check consumption of liquor and luxury goods. It is also used to protect local industry. Canons of Taxation

Four canons mentioned by Adam Smith:

1. Canons of Equality: The burden of taxation must be distributed equitably in relation to the ability of the tax payers. 2. Canons of Certainty: The tax payer should be well informed about the time, amount and method of tax payment. 3. Canon of Economy: The cost of tax collection and payment should be minimum. 4. Canon of Convenience: The time and mode of tax payment should be convenient to the taxpayer. Different Tax System

Classification on the basis of incidence
* Direct tax (Taxes paid entirely by the persons on whom they are imposed. The burden cannot be shifted to others. Such as Income Tax); * Indirect tax (Taxes imposed on sales or purchase of any goods or services. The burden is shifted to others. Such as VAT, customs duty) Classification on the basis of structure of tax rate

* Proportional Tax: Whatever the size of income, the rates of taxation remains constant. Same percentage is charged on all taxpayers. * Progressive Tax: The rate of taxation increases as the taxable income increases. Higher the income, higher the rate. It is considered more equitable. * Regressive Tax: Burden falls more heavily on the poor than the rich. Tax rate decreases as the tax base increases. * Degressive tax: Tax may be slowly progressive up to a certain limit, after that it may be charged at a flat rate. Characteristics of a good Tax System...
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