Taxation has been the primary source of revenue for states across the world for centuries and India is no exception to this. The nation has a structured tax system that employs both progressive and proportional taxation based on income and other factors and is determined by central and state governments. The money received by the government is known as tax revenue and may be utilized for a broad spectrum of purposes such as infrastructure development in the form of roads, railways, bridges, dams etc., public healthcare and education, defence and civil services, to name a few. Helping the government fulfill its development goals is the main importance of taxes.
India’s tax to GDP ratio as of 2018-19 was 10.9%, a worryingly low number given that the average ratio for OECD member states is around 34%. A high tax to GDP ratio signifies the government’s ability to manage its spending effectively, without relying on excess borrowing. High ratios are also generally associated with developed nations. India’s relatively low figures could be indicative of the reduced collection of service taxes, comparatively high GDP growth as well as income tax evasion prevalent among large corporations and the upper strata of society.
Types Of Taxes : Taxation can be broadly divided into two categories based on its mode of implementation:
- Direct Taxes : These taxes are levied on individuals or organizations and include income tax (corporate and individual), wealth tax, capital gains tax, perquisite tax, agricultural tax as well as property tax among others. They are directly paid to the governments and represent a significant portion of revenue collected, which is the underlying importance of taxes of this nature. All entities with incomes higher than the limits exempt from taxation are required to pay income tax. The rates of taxation are also determined based on the relative wealth and incomes of taxpayers.
- Indirect Taxes : These taxes are collected indirectly by the government and are charged on availing or purchasing goods and services. They are paid by consumers to service providers who then have to pay the same amount to the government or local bodies. The system previously included a wide array of taxes including the Value Added Tax, excise duty, customs charges, service tax and sales tax. With the enforcement of the Goods and Services Tax Bill in July 2017, many of these were consolidated into a single system of taxation with five slabs of tax rates, namely - 0%, 5%, 12%, 18% and 28%.
Although they may vary in their method of collection, the importance of these taxes lie in the manner in which local bodies or governments collect and utilize them and this can have a massive impact on a nation’s development.
Importance Of Direct Taxation :
- Direct taxation is one of the main sources of income for the government.
- It also affects inflation, demand and supply within the economy by regulating disposable incomes across the board.
- Luxury goods and services are the most affected by this regulation and so, the tax rates have to strike a balance between providing administrative funds, limiting inflation and leaving enough disposable income to encourage consumption.
- Deductions on certain services such as insurance or some types of loans will attract individuals and organizations to invest in the Indian economy and generate usable capital.
- This will allow for greater stability in the economy while also providing stakeholders with a greater degree of financial security.
- More capital flowing into the country will increase revenue and in turn affect tax collection, providing the government with a higher budget for expenditure on developing the nation’s infrastructure, as well as its natural, man made and human resources.
Importance Of Indirect Taxation :
- Indirect taxes have been put in place to ensure that resources are used efficiently by individuals and organizations as lower expenditure on raw materials will mean lower margins lost on taxes.
- In turn, lowered costs of production will raise profits and foster healthy competition among rival organizations thereby developing the economy.
- This also provides consumers with a wider variety of options catered to their needs, facilitating improvements in standards of living.
- The burden of taxation falls on the consumers in the end, as most retailers, manufacturers and service providers will attempt to recover taxes on initial expenses in the sales price itself.
- Hence the importance of taxes of this kind lies in how it incentivizes organizations to make their operations as efficient as possible.
The importance of taxes can be witnessed in the plethora of ways in which their regulation affects the ebb and flow of economic activity. Proper regulation of the tax system and the efficient collection of payments will provide governments with adequate funds to invest in improving the overall quality of life within their borders. The provision of tax deductions on certain investments and services such as life insurance allows individuals as well as organizations to operate with more freedom and financial security. One such example is the Invest 4G term plan from Canara HSBC Oriental Bank of Commerce Life Insurance which allows for tax deductions on premiums as per Section 80C of the Income Tax Act of 1961.