Reasons Why We do Pay Taxes?
Reasons Why We do Pay Taxes? Tax is one of the main sources of income for any Government of a country. Without tax receipts, Governments cannot meet their expenditures of the state. That is the reason that tax collection is the top priority of any country. We will discuss it in detail later at the end.
Non Tax Revenue Sources of Income
In addition to taxes followings may be other sources of income for any country:
- License Fees
- Profits from the State Owned Industries & Businesses
- Fines & Penalties
- Gifts & Grants
- Printing of Paper Money
- Borrowings from International Institutions
- Issue of Government Securities
- Issuance of Government Bonds
- Borrowings from Local Commercial Banks & Financial Institutions
- Borrowing from Central Bank
- Lease of Government Buildings
Ultimately, Government mainly relies on tax recoveries as these can be budgeted. Every country plans its revenue and capital expenditures according to the estimates about taxes. Tax Revenue Authorities achieve tax recovery targets based on a monthly, quarterly, and annual basis.
Types of Taxes
Governments may charge the following types of taxes on their masses:
- Income Taxes
- Sales Taxes
- Value-Added Taxes
- Custom Duties
- Excise Duties
- Property Tax
- Token Taxes on Vehicles
- Stamp Duties
- Professional Tax
- Motor Vehicle Taxes
- Tax on Goods
- Tax on Services
- Fines & Penalties
- Corporation Tax
- Wealth Tax
- Tax on Land Revenue
- Personal / Individual Income Tax
- Registration Fees
- Direct Taxes
- Indirect Taxes
Categories of Taxes
Tax can be categorized into some of the followings:
- Direct Taxes: It Is paid by individuals and companies, such as income tax, corporate tax, and export duty. It also includes Capital Gains Tax and Gift tax.
- Indirect Taxes: This tax is not paid directly by the person who bears its burden. It is charged on goods and services which are purchased by individuals. Businessman ultimately recovers it from the end consumer.
- Impersonal Tax: Taxing the person without considering the actual income status of the taxpayer (examples are property tax, VAT, etc.,).
- Personal Tax: Taxing the person after considering the actual income status of the taxpayer (an example is Income Tax etc.,).
- Proportional Tax: It is calculated by the fixed rate (e.g., VAT)
- Progressive Tax: It is calculated according to the taxpayer’s taxable income; the higher the income, the higher the will be tax rates.
- Analytic Tax: It is charged by considering only one item Like property tax.
- Synthetic Tax: It is calculated by considering an overall group of items on which tax is applied, like Income Tax, Wealth tax, etc.,
Prerequisites of Tax
We calculate and pay Tax when the following elements or prerequisites exist:
- Taxable Item: An element/item on which tax paid/charged (e.g., Taxable Income, Salary, Rental Income, Capital Gain, Foreign Source Income, Business Income, etc.,).
- Taxable Person: means a person who is liable to pay tax (e.g., Salaried Person, Sole Proprietor, Partnership Business, Private/Public Limited Company)
- Taxable Event: any event that provides the reason for the charge of tax, like sale/purchase of property, purchase of vehicle.
- Due Date: A time period under which tax liability is necessary to meet.
Why we do Pay Taxes? – Reasons
Tax administration is based on the tax laws of the country and the tax revenue authority administering it. Government proposes and afterward passes the annual budget of the country in the National Assembly. National Assembly passes Finance Bill to determine the revenue targets and expected expenditures.
Law abeyance is the responsibility of every citizen of the country, that is the reason that every person pays tax whose income is taxable and declares it periodically.
The government takes action when someone does not follow the laws. Tax authorities enforce the tax law of the country. Tax Authorities do Assessments and Audits to determine the actual tax on the income of the person. For this purpose, they issue tax notices by asking for queries from the taxpayers.
Let us discuss the reasons of paying taxes by the masses of the country:
- It is the responsibility of every citizen to do tax compliance
- Payment of tax by citizens directly links with the development of his country, the higher the tax they will pay more the facilities they can expect from their government.
- Government has to raise their reserves to import the basic needs of the country like Petroleum products etc.,
- To pay salaries and pensions to Government employees
- To complete the development and infrastructure in the country
- managing the state-owned institutions
- To provide medical facilities in the country
- Best Education facilities can be provided if we pay taxes
- Government-run welfare institutes for the public by collecting taxes
- To develop tax culture tax charged on the higher income persons
- Tax is not a burden, it’s a responsibility
- Every country wants to make its defense strong and for this purpose money needs which collects through taxes
- To manage the different government-based programs and schemes
- Sometimes the special tax is charged due to emergency conditions in the country like flood, earthquake, or war.
Why we avoid taxes? – Reasons
Sometimes we avoid to pay tax, there are following reason of tax evasion:
- If country’s taxation system is not favorable
- Government policies are not in favor of masses
- Literacy rate in the country is very low
- Tax laws of the country is very complex
- High inflation rate in the country
- Higher rates of taxes
- Undocumented economy of the country
- Corruption culture in the country
- Lack of tax incentives and exemptions
- Inefficiency of the tax revenue authority
- Usage of digital mediums has made it complex to manage the transactions and to do tax compliance