Tax And Its Importance

Class 7 | Social Science — Economics | Unit 1

Class 7 Unit 1 Economics

Tax and its Importance

Learning Objectives

To know the Taxation, Principles of Taxation and its types.

To know the importance of Tax and its types.

To gain knowledge of the need for Tax and People's Welfare.

இயற்றலும் ஈட்டலுங் காத்தலும் காத்தவகுத்தலும் வல்ல தரசு. திருவள்ளுவர்

"It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand fold"

Said by – Kalidas

Introduction

For the welfare of the society, the government has to perform various functions so it requires revenue. Modern governments have a wider variety of sources of revenue. The principal sources of the revenue are taxes, fees, prices, special assessment and Raffle Scheme. Like any other country, taxes form the most important part of revenue of India.

Taxation

Taxation is a term for when a taxing authority, usually a government, levies or imposes a tax. The term 'taxation' applies to all types of involuntary levies, from income to capital gains to estate taxes. Though taxation can be a noun or verb, it is usually referred to as an act; the resulting revenue is usually called 'taxes'.

Taxes

Taxes are compulsory payments to the government without expectations of direct or return or benefit to the taxpayers. According to Prof. Seligman, taxes are defined as a compulsory contribution from a person to the government to defray the expenses incurred in the common interest of all without reference to special benefits conferred.

Why are Taxes Imposed?

Everybody is obliged by law to pay taxes. Total Tax money goes to government exchequer. The government decides how are taxes to be spent and how the budget is to be organized. Tax payment is not optional. An individual has to pay tax if any income comes under the income tax slab. It is a duty of every citizen to pay taxes. More collection of tax allows the government to implement more and more welfare schemes.

Principle of taxation

Adam Smith's principles or cannons of taxation still form the basis of the tax structure of a modern state:

Adam Smith's four Canons of Taxation:

1. Canon of Equality

2. Canon of Certainity

3. Canon of Convenience

4. Canon of Economy

1. Canon of Equality

the government should impose taxes in such a way that people have to pay according to their ability. It does not mean equal amount of tax but it means that the burden of a tax must be fair and just.

2. Canon of Certainty

Certainty creates confidence in the tax payers cost of collection of taxes and increases economic welfare because it tends to avoid all economic waste.

3. Canon of Convenience

Taxes should be levied and collected in such a manner that it provides a maximum of convenience to the taxpayers. It should always be kept in view that the taxpayers suffer the least inconvenience in payment of the tax.

4. Canon of Economy

Minimum possible money should be spent in the collection of taxes. Collected amount should be deposited in the Government treasury.

Taxation Types

There are three types of Taxation :

1. Proportional Tax

2. Progressive Tax

3. Regressive Tax

Proportional Taxation

Proportional Taxation is a method, where the rate of tax is same regardless the size of the income. The tax amount realized will vary in the same proportion as that of income. If tax rate is 5 percent on income and Mister. X gets an income of Rupees.1,000, he will pay Rupees.50, mister. B gets an income Rupees. 5,000, he will pay tax of Rupees.250. In short, proportional tax leaves the relative financial status of taxed persons unchanged.

Progressive Taxation

Progressive Taxation is a method by which the rate of tax will also increase with the increase of income of the person. If a person with Rupees .1000 income per annum pays a tax of 10 percent That is Rupees.100, a person with an income of Rupees .10,000 per annum pays a tax of 25percent Within Bracket That is Rupees.2,500 and a person with income of 1 lakh per annum pays the tax of 50 percent that is Rupees.50,000.

Regressive Taxation

A regressive tax is a tax applied uniformly, taking a larger percentage of income from low income earners than from high income earners. It is in opposition to a progressive tax.

Importance of Tax

Without taxes, governments would be unable to meet the demands of their societies. Taxes are crucial because governments collect this money and use it to finance under the following social projects.

1. Health

Without taxes, government contributions to the health sector would be impossible. Taxes go to funding health services such as social healthcare, medical research, social security, etcetera.

2. Education

Education could be one of the most deserving recipients of tax money. Governments put a lot of importance in the development of human capital and education is central in this development.

3. Governance

Governance is a crucial component in the smooth running of country affairs. Poor governance would have far reaching ramifications on the entire country with a heavy toll on its economic growth. Good governance ensures that the money collected is utilized in a manner that benefits citizens of the country.

4. Other important sectors

Other important sectors are infrastructure development, transport, housing, etcetera. Apart from social projects, governments also use money collected from taxes to fund sectors that are crucial for the wellbeing of their citizens such as security, scientific research, environmental protection, etcetera. Some of the money is also channeled to fund projects such as pensions, unemployment benefits, childcare, etcetera.

Taxes can affect the state of economic growth of a country. Taxes generally contribute to the gross domestic product Within in Bracket Gross Domestic Product of a country.

Types of tax

In modern times taxes are classified into two types. There are:

1. Direct Tax;

2. Indirect Tax

Direct Tax

A Direct tax is paid directly by an individual or organisation to imposing entity. A tax payer, for example, pays direct taxes to the Government for different purposes, including real property tax, personal property tax, income tax or taxes or on asserts.

Income Tax

Do You Know?

Central Board of Revenue bifurcated and a separate Board for Direct Taxes known as Central Board of Direct Taxes within bracket CBRB constituted under the Central Board of Revenue Act, 1963.

Other examples of direct tax are

Corporation Tax

It is levied on profit of corporations and companies. It is charged on royalties, interest, gains from sale of capital assets located in India, fees for technical services and dividends.

Wealth Tax

It is imposed on property of individuals depending upon the value of property. The same property will be taxed every year on its current market value.

Gift Tax

It is paid to the Government by the recipient of gift depending on value of gift.

Estate Duty

It is charged from successor of inherited property. It is not desirable to avoid payment of taxes .They are levied directly on income and property of persons, who pay directly to the government.

Indirect Tax

On the other hand when liability to pay a tax is on one person and the burden of that tax shifts on some other person, this type of tax is called an indirect tax. Indirect Tax is a tax whose burden can be shifted to others. For example.

Service Tax

It is raised on provision of Service. This tax is collected from the service recipients and paid to the Central Government

Sales Taxation or value Added Tax

It is an indirect tax on sale of goods because liability to collect tax is that of shopkeeper but the burden of that tax falls on the customer. The shopkeeper realizes the tax amount from the customer by including it in the price of the commodity that he sells.

Excise Duty

It is paid by the producer of goods, who recovers it from wholesalers and retailers. This tax in India is levied by the Central Government.

Entertainment Tax

The state governments charge such tax on every transaction related to entertainment. Some examples are movie tickets, video game arcades, stage shows, exhibitions, amusement parks, and sports-related activities.

Goods and Services Tax within bracket GST

Goods and Services Tax is a kinds of tax imposed on sale, manufacturing and usage of goods and services. This tax is applied on services and goods at a national level with a purpose of achieving overall economic growth. Goods and services tax is particularly designed to replace the indirect taxes imposed on goods and services by the Central and State.

Introduction to Goods and services tax

Previous Indirect Tax Structure and its difficulties

The history of Indian taxation goes back to ancient period. According to Arthshastra, the book written by Kautilya, in ancient time taxes were levied and collected in both cash and kind. The modern history of Indirect taxes starts from the early Twentyth century when Central Excise Duty was imposed on Salt, Sugar, Motor Spirit, etcetera. Gradually the base of Excise duties was widened. At the time of independence, the system of Central Excise Duty at the national level and the Sales Tax at the State level was prevailing. After prolonged efforts and amendments, VAT was introduced first in Indian State of Haryana in 2003 and thereafter in 24 States / Union Territories including Punjab, Chandigarh, Himachal Pradesh, Jammu and Kashmir and Delhi in 2005. If the Value Added Tax was a major improvement over the pre-existing Sales Tax regime, then the Goods and Services Tax within bracket GST is indeed an remarkable improvement and the next logical step towards realising perfection in taxation system in the country. Initially, it was proposed that there would be a single and national level Goods and Services Tax. However, the Goods and Services Tax tax regime has been finally implemented from first July, 2017 across India. With thus there is a economic union of the country with ONE TAX, ONE MARKET AND ONE NATION.

Goods and Services Tax within bracket GST is a tax on all the goods and services that we buy. It has two parts, the Central Goods and Services Tax within bracket CGST and State Goods and Services Tax within bracket SGST. It is a transparent tax. If you get a bill for the products you buy, you will find the following information:

Example:

Value of the Product = Rupees .100

State Goods and Services Tax 9 percent = Rupees.9

Central Goods and Services Tax 9 percent = Rupees.9

Total = Rupees.118

In the bill, the Goods and Services Tax is 18 percent and it is divided equally as 9 percent for the Central and State Governments. Therefore, Rupees 9 will go to Tamil Nadu Government and another Rupees 9 will go to Central government.

If a seller in Tamil Nadu sells a commodity to a buyer in other state within bracket for example Karnataka, it is called inter-state trade. In the case of inter-state trade, the bill will be as given below:

Example:

Value of the Product = Rupees.100

Integrated Goods and Services Tax 18 percent = Rupees.18

Total = Rupees.118

Rupees 18 will go to Central government. Central government will take Rs 9 and send another Rs 9 to Karnataka government.

The tax is divided into five slabs - 0 percent, 5 percent, 12 per cent, 18 per cent, and 28 per cent. Although Goods and Services Tax is collected by the central government, taxes on petroleum products, alcoholic drinks, electricity are separately collected by the state government and almost all the necessities of life like vegetables and food grains are exempted from this tax.

Toll Tax and Road Tax

Toll tax is a tax you often pay to use any form of infrastructure developed by the government, example roads and bridges. The tax amount levied is rather negligible which is used for maintenance and basic upkeep of a particular project.

Swachh Bharat Cess

This is a cess imposed by the government of India and was started from 15 November 2015. This tax is applicable on all taxable services and the cess currently stands at 0.5percent. Swachh Bharat cess is levied over and above the 14percent service tax that is prevalent in the present times.

Distinction between Direct and Indirect tax

Direct Tax	Indirect Tax
Direct Tax Burden cannot be shifted by taxpayers	Indirect Tax Easily be shifted to another person
Direct Tax is imposed on personal income and corporate income	Indirect Tax Taxes imposed on various goods and services
Direct tax has no inflation pressure	Indirect Tax This tax has inflation pressure
The impact and incidence are the same in case of direct tax	The impact and incidence are different in case of indirect tax
Direct tax is less elastic	Indirect tax is more elastic

Need for Tax and Peoples Welfare

The levying of taxes aims to raise revenue to fund governing. It helps alter prices in order to balance the affect of demand. States and their functional equivalents throughout history have used money provided by taxation to carry out many functions. Some of these include expenditures on economic infrastructure like, transportation, sanitation, public safety, education, health-care systems, military, scientific research, culture and the arts, public works, public insurance, etcetera. A government's ability to raise taxes is called its fiscal capacity. When expenditures exceed tax revenue, a government accumulates debt. A portion of taxes may be used to serve past debts. Governments also use taxes to fund welfare and public services. These services can include education systems, pensions for the elderly, unemployment benefits, and public transportation. Energy, water and waste management systems are also common public utilities.

According to the proponents of the list theory of money creation, taxes are not needed for government revenue, as long as the government in question is able to issue flat money. The purpose of taxation is to maintain the stability of the currency, express public policy regarding the distribution of wealth, subsidizing certain industries or population groups or isolating the costs of certain benefits, such as highways or social security.

Summary

Taxation is a term used for when a government taxing authority levies or imposes a tax. The term 'taxation' applies to all types of involuntary levies, from income to capital gains to estate taxes. Taxes are compulsory payments to the government without expectations of direct or return or benefit to the taxpayers. Proportional Taxation is a method, where the rate of tax is same regardless size of the income. Governance is a crucial component in the smooth running of country affairs. A Direct tax is the tax whose burden is directly borne by the person on whom it is imposed, that is., its burden cannot be shifted to others. Estate is charged from successor of inherited property. It is not desirable to avoid payment of taxes. Indirect Tax is a tax whose burden can be shifted to others. Excise duty in India is levied by the Central Government. Goods and Services Tax is a kinds of tax imposed on sale, manufacturing and usage of goods and services. The levying of taxes aims to raise revenue to fund governing or to alter prices in order to affect demand. States and their functional equivalents throughout history have used money provided by taxation to carry out many functions.

References

1. Public Finance, Tyagi.

2. Public Finance, H.L. Bhatia.

3. Direct Taxes, V.K. Singhania.

4. htt:\\www.GST.in.

Glossary

Equality equal opportunities சமத்துவம் Convenience the state of being able to proceed with something without difficulty வசதி Proportional equivalent விகிதாசார Regressive taking a proportionally greater amount from those on lower incomes பிற்போக்கு வரி Inherited received as an heir at the death of the previous holder மரபுரிமை Accumulate gather குவிக்க Subsidize contribute to மானியம் Persecution unfair treatment of a person or a group, especially because of their religious or political beliefs துன்புறுத்தல், அடக்குமுறை

Evaluation

Exercise 1. Choose the correct answer:

1. Taxes are _____ payment.

a) Voluntary b) Compulsory c) a and b d) None of the above

ANSWER: b) Compulsory

2. Minimum possible amount should be spent in the collection of taxes is

a) canon of equality b) canon of certainity c) canon of economy d) canon of convenience

ANSWER: c) canon of economy

3. This taxation is a very opposite of progressive taxation.

a) degressive b) proportional c) regressive d) none

ANSWER: b) proportional

4. Income tax is a

a) direct tax b) indirect tax c) a and b d) degressive tax

ANSWER: a) direct tax

5. Which tax is raised on provision of service.

a) wealth b) corporate c) wealth d) service

ANSWER: d) service

Exercise 2. Fill in the blanks:

1. is a term for when a taxing authority usually a government levies or imposes a tax.

ANSWER: TAXATION

2. is the method, where the rate of tax is same regardless size of the income.

ANSWER: PROPORTIONAL TAX

3. is paid to the Government by the recipient of gift depending on value of gift.

ANSWER: GIFT

4. tax burden cannot be shifted by tax payers.

ANSWER: DIRECT

5. Indirect tax is elastic.

ANSWER: MORE

Exercise 3. Match the following:

1. Principle of taxation
2. Estate tax
3. Excise Tax
4. 01.07.2017
5. Direct Tax

ANSWER:

1. Principle of taxation – Adam Smith

2. Estate tax – Direct Tax

3. Excise Tax – Indirect Tax

4. 01.07.2017 – Goods and Service Tax

5. Direct Tax – Less elastic

Exercise 4. Odd one out:

1. Which one of the following is not a indirect tax?

a) Service tax b) Value Added Tax Within Bracket VAT c) Estate duty d) Excise duty

ANSWER: c) Estate duty

Exercise 5. Correct one out:

1. Which one of the following tax is a direct tax?

a) Service tax b) Wealth tax c) Sales tax d) Progressive tax

ANSWER: b) Wealth tax

Exercise 6. Give short answer:

1. Define tax.

2. Why taxes are imposed?

3. Write name of taxation types and draw its diagram.

4. Write any three importance of tax.

5. What are the types of tax? and explain its.

6. Write short note on Gift Tax and Service Tax.

7. What is Goods and Service Tax?

8. Distinguish between the direct and indirect tax.

Exercise 7. Give brief answer:

1. Write briefly about the principles of taxation.

2. Explain the taxation types.

3. Explain the importance of tax.

4. Explain the direct and indirect tax with examples.

5. Why need for tax on people welfare? And explain it.

Exercise 8. Activity and Project

1. Students are asked to go to the nearest departmental store and know about the Goods and Service tax Within Bracket GST. Teacher and students are discussed about the Goods and Service Tax.

2. Teacher asks the student to write an essay on what is tax? why we pay tax? And how does the Government use this tax for the welfare of the people.

Exercise 9. Life Skills:

1. Teacher and Students together discuss about the tax and their importance of development of country.

SOCIAL SCIENCE– 7

List of Authors and Reviewers - Term 3

HISTORY

Academic Adviser
Dr. P. KUMAR
Joint Director (syllabus), SCERT, Chennai-6.

Academic Co-ordinator
Dr. K. RAMARAJ
Vice principal, DIET, T.Kallupatti, Madurai.

Content Readers
Dr. S. RAVICHANDRAN
Associate Professor (Retired), Rajapalayam Raju's College, Rajapalayam.
Dr. I. PRINCES
Assistant Professor, Dept of History Loyola College, Chennai.
Dr. K. SURESH
Bachelor Teacher, Kumara Rajah Muthiah Higher Secondary School, Adyar, Chennai.
S. RAJESWARI
Bachelor Teacher, Government Higher Secondary School, Nellikkuppam, Kanchipuram.
H. USHA
Bachelor Teacher, Sri. R.K.M. Sarada Vidyalaya Government Higher Secondary School, Usman Road, T.Nagar, Chernnai.
S. MANJU
Teacher Educator (History)Block Resource centre, Sedapatti, Madurai.

Chair Person
Dr. MANIKUMAR K.A.
Professor & Head (Retired), Dept. of History, Manonmaniam Sundaranar University, Tirunelveli.

Copy Editor
K. VENKATESH

Content Writers
Dr. J. MURUGAN
Associate Professor, Dept of History, Arignar Anna Govt Arts College, Attur, Salem.
Dr. E. MANAMARAN
Associate Professor, Dept of History, Dharmapuram Gnanambigai Govt. Arts College for Women, Mayiladuthurai.
Dr. CINTHIA JUDE
Associate Professor, Dept of History and Tourism, Stella Maris College, Chennai.

GEOGRAPHY

Domain Expert
Dr. R. JAGANKUMAR
Associate Professor & Head, Dept of Geography, Bharathidasan University, Trichy.

Reviewer
V. KUMARASWAMY
SG Lecturer in Geography (Retired), Govt. College for Men (Autonomous), Kumbakonam.

Content Reader
R. INDHUJA
Teacher Educator (Geography) Block Resource centre, Thiruparankundram, Madurai.

Authors
Dr. M. KAMALA
Post Graduate Teacher, Arignar Anna Government Higher Secondary School, Kumbakonam, Thanjavur.
N. HEMAVATHY
Bachelor Teacher, Govt, AdiDravidar Welfare Government Higher Secondary School, Kannigapuram, Chennai.
M.ANANDAKUMAR
Post Graduate Teacher, Government Higher Secondary School, T. Palur, Ariyalur.
CHITRA UMAPATHY
Bachelor Teacher, S B I O A Model Matric Higher Secondary School, Mogappair, Chennai.

CIVICS

Domain Expert
Dr. M. KALIYAPERUMAL
Associate Prof & Head (Retired) Dept of Political Science, Presidency College, Chennai.

Content Reader
R. SUDHA BAGIRATHI
Teacher Educator (History) Block Resource centre, Kallikudi, Madurai.

Reviewer & Author
SIVAKUMAR RENGASAMY
Assistant Professor, Department of Political Sceince, Presidency College, Chennai.

Author
S. ANANTHA SORUBA SHANTHI
Senior Lecturer (Retired), DIET, T. Kallupatti, Madurai.

ECONOMICS

Domain Expert & Reviewer
Dr. CHITHRA REGIS
Assistant Professor, Department of Economics, Loyola College, Chennai.

Author
L. GOWSALYA DEVI
Post Graduate Teacher Assistant, Government Higher Secondary School, Thoppur, Dharmapuri

Art and Design Team

Illustration & Image Credits
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SHALINI RAJU

Layout
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Wrapper
KATHIR ARUMUGAM

QC
MANOKAR RADHAKRISHNAN

Co-ordination
RAMESH MUNISAMY

Typist
KALPANA JAGANATHAN

ICT Coordinator
A. AJAY
Secondary Grade teacher, Panjayat Union Middle School, Nandhimangalam, Kumaratchi Block, Cuddalore.

EMIS Technology Team

R.M. SATHEESH
State Coordinator Technical, Tamil Nadu EMIS, Samagra Shiksha.

K.P. SATHYA NARAYANA
IT Consultant, Tamil Nadu EMIS, Samagra Shiksha

R. ARUN MARUTHI SELVAN
Technical Project Consultant, Tamil Nadu EMIS, Samagra Shiksha

Book-back Exercises — Questions & Answers

Answers generated strictly from the Samacheer Kalvi textbook content. Attempt each question first, then click "Show Answer" to check.

1. Choose the correct answer:

1. Taxes are DASH payment.

a) Voluntary b) Compulsory c) a and b d) None of the above

Answer: b) Compulsory

Explanation: Taxes are compulsory payments to the government without expectations of direct or return or benefit to the taxpayers.

2. Minimum possible amount should be spent in the collection of taxes is

a) canon of equality b) canon of certainity c) canon of economy d) canon of convenience

Answer: c) canon of economy

Explanation: Canon of Economy states that minimum possible money should be spent in the collection of taxes.

3. This taxation is a very opposite of progressive taxation.

a) degressive b) proportional c) regressive d) none

Answer: c) regressive

Explanation: A regressive tax is in opposition to a progressive tax, taking a larger percentage of income from low income earners than from high income earners.

4. Income tax is a

a) direct tax b) indirect tax c) a and b d) degressive tax

Answer: a) direct tax

Explanation: Income tax is an example of direct tax, which is levied directly on income and paid directly to the government.

5. Which tax is raised on provision of service.

a) wealth b) corporate c) wealth d) service

Answer: d) service

Explanation: Service Tax is raised on provision of Service and is collected from the service recipients and paid to the Central Government.

2. Fill in the blanks:

1. DASH is a term for when a taxing authority usually a government levies or imposes a tax.

Answer: TAXATION

2. DASH is the method, where the rate of tax is same regardless size of the income.

Answer: PROPORTIONAL TAX

3. DASH is paid to the Government by the recipient of gift depending on value of gift.

Answer: GIFT TAX

4. DASH tax burden cannot be shifted by tax payers.

Answer: DIRECT

5. Indirect tax is DASH elastic.

Answer: MORE

3. Match the following:

3. Match the Following

Column A	Column B
1. Principle of taxation	Direct Tax
2. Estate tax	Goods and Service Tax
3. Excise Tax	Adam Smith
4. 01.07.2017	Less elastic
5. Direct Tax	Indirect Tax

Answers: 1-Adam Smith, 2-Direct Tax, 3-Indirect Tax, 4-Goods and Service Tax, 5-Less elastic

4. Odd one out:

1. Which one of the following is not a indirect tax?

a) Service tax b) Value Added Tax (VAT) c) Estate duty d) Excise duty

Answer: c) Estate duty

5. Correct one out:

1. Which one of the following tax is a direct tax?

a) Service tax b) Wealth tax c) Sales tax d) Progressive tax

Answer: b) Wealth tax

6. Give short answer:

1. Define tax.

Answer: Taxes are compulsory payments to the government without expectations of direct or return or benefit to the taxpayers. According to Prof. Seligman, taxes are defined as a compulsory contribution from a person to the government to defray the expenses incurred in the common interest of all without reference to special benefits conferred.

2. Why taxes are imposed?

Answer: Everybody is obliged by law to pay taxes. Tax payment is not optional and it is a duty of every citizen to pay taxes. More collection of tax allows the government to implement more and more welfare schemes. The government uses tax money to fund various social projects and welfare activities.

3. Write name of taxation types and draw its diagram.

Answer: There are three types of Taxation: 1. Proportional Tax 2. Progressive Tax 3. Regressive Tax. Proportional taxation has the same rate regardless of income size, progressive taxation increases rate with income increase, and regressive taxation takes a larger percentage from low income earners.

4. Write any three importance of tax.

Answer: 1. Health - Taxes fund health services such as social healthcare, medical research, and social security. 2. Education - Governments use tax money for education development as it is central to human capital development. 3. Governance - Good governance ensures collected money is utilized for citizens' benefit and economic growth.

5. What are the types of tax? and explain its.

Answer: In modern times taxes are classified into two types: 1. Direct Tax - paid directly by an individual to the imposing entity, burden cannot be shifted. Examples include income tax, corporation tax, wealth tax. 2. Indirect Tax - burden can be shifted to others. Examples include service tax, sales tax, excise duty.

6. Write short note on Gift Tax and Service Tax.

Answer: Gift Tax is paid to the Government by the recipient of gift depending on value of gift. Service Tax is raised on provision of Service and is collected from the service recipients and paid to the Central Government. It is an indirect tax where the burden falls on the service recipients.

7. What is Goods and Service Tax?

Answer: Goods and Services Tax (GST) is a tax imposed on sale, manufacturing and usage of goods and services. It was implemented from July 1, 2017 across India with the vision of ONE TAX, ONE MARKET AND ONE NATION. It has two parts - Central GST (CGST) and State GST (SGST).

8. Distinguish between the direct and indirect tax.

Answer: Direct Tax burden cannot be shifted by taxpayers while Indirect Tax can easily be shifted to another person. Direct Tax is imposed on personal income and corporate income while Indirect Tax is imposed on various goods and services. Direct tax is less elastic while indirect tax is more elastic.

7. Give brief answer:

1. Write briefly about the principles of taxation.

Answer: Adam Smith's four Canons of Taxation form the basis of modern tax structure: 1. Canon of Equality - people should pay according to their ability, ensuring fair and just tax burden. 2. Canon of Certainty - creates confidence in taxpayers and increases economic welfare. 3. Canon of Convenience - taxes should provide maximum convenience to taxpayers with least inconvenience. 4. Canon of Economy - minimum money should be spent in tax collection with maximum amount deposited in government treasury.

2. Explain the taxation types.

Answer: There are three types of taxation: 1. Proportional Tax - same tax rate regardless of income size, leaves relative financial status unchanged. 2. Progressive Tax - tax rate increases with increase in income, higher earners pay higher percentage. 3. Regressive Tax - applied uniformly but takes larger percentage from low income earners than high income earners, opposite to progressive tax. Each type affects different income groups differently based on their earning capacity.

3. Explain the importance of tax.

Answer: Without taxes, governments would be unable to meet society's demands. Taxes are crucial for funding social projects: Health sector receives funding for social healthcare, medical research, and social security. Education gets priority as it's central to human capital development. Good governance ensures proper utilization of collected money for citizens' benefit. Other important sectors include infrastructure development, transport, housing, security, scientific research, environmental protection, pensions, unemployment benefits, and childcare. Taxes contribute to the country's Gross Domestic Product and economic growth.

4. Explain the direct and indirect tax with examples.

Answer: Direct Tax is paid directly by individuals to the government and burden cannot be shifted. Examples include Income Tax on personal income, Corporation Tax on company profits, Wealth Tax on property value, Gift Tax paid by gift recipients, and Estate Duty on inherited property. Indirect Tax burden can be shifted to others. Examples include Service Tax on service provision, Sales Tax/VAT on goods sale, Excise Duty paid by producers but recovered from wholesalers, Entertainment Tax on entertainment transactions, and GST on goods and services. The key difference is that direct taxes are borne by the original taxpayer while indirect taxes are passed on to consumers.

5. Why need for tax on people welfare? And explain it.

Answer: Tax is essential for people's welfare as it provides government with fiscal capacity to fund public services. Tax revenue is used for economic infrastructure like transportation, sanitation, public safety, education, healthcare systems, military, scientific research, culture and arts, public works, and public insurance. Governments use taxes to fund welfare services including education systems, pensions for elderly, unemployment benefits, public transportation, energy, water and waste management systems. The levying of taxes aims to raise revenue for governing and maintaining currency stability. It helps express public policy regarding wealth distribution and subsidizing certain industries or population groups for overall societal benefit.

📝 Summary

1. Taxation is a compulsory payment to the government without expectation of direct return or benefit, serving as the principal source of revenue for performing various governmental functions for society's welfare.
2. Adam Smith's four canons of taxation form the basis of modern tax structure: Canon of Equality (fair burden according to ability), Canon of Certainty (creating confidence), Canon of Convenience (maximum ease for taxpayers), and Canon of Economy (minimum collection cost).
3. There are three main types of taxation systems: Proportional Tax (same rate regardless of income size), Progressive Tax (rate increases with income), and Regressive Tax.
4. Tax payment is obligatory by law and not optional - every citizen has a duty to pay taxes if their income falls under the income tax slab, with all tax money going to the government exchequer.
5. Higher tax collection enables the government to implement more welfare schemes and organize the budget effectively, as the government decides how taxes are spent for the common interest of all citizens.