Taxation A means by which governments finance their expenditure by imposing charges on citizens and corporate entities.

Governments use taxation to encourage or discourage certain economic decisions. For example, reduction in taxable personal (or household) income by the amount paid as interest on home mortgage loans results in greater construction activity, and generates more jobs. See also taxation principles Tax A fee charged ("levied") by a government on a product, income, or activity. If tax is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on the price of a good or service, then it is called an indirect tax. The purpose of taxation is to finance government expenditure. One of the most important uses of taxes is to finance public goods and services, such as street lighting and street cleaning. Since public goods and services do not allow a non-payer to be excluded, or allow exclusion by a consumer, there cannot be a market in the good or service, and so they need to be provided by the government or a quasi-government agency, which tend to finance themselves largely through taxes.

Objectives Of Taxation The basic objective of taxation is to raise resources for the State. Different objectives of taxation may be summed up as under:

Objective of raising revenue: The basic and primary objective of taxation is raising revenue. Enormous amount needed by modern governments for National defence, creation of infrastructure and social upliftment schemes make regular and systematic resource mobilization compulsory.

Regulatory objectives: Taxation performs an important regulatory role in different socio economic aspects. o Regulatory consumption: State can discourage consumption of harmful and undesirable goods by levying prohibitive rates of tax. o Regulatory production: Production may be encourages by exempting new industries from tax for someone, reducing tax on capital goods, increasing tax on imported goods to encourage local production, etc. o Regulating imports and exports: Imports of undesirable products can be curbed by imposing prohibitively high import duties. Exports can be encourages by cutting duties and taxes on exports. o Regulating effects of inflation, depression etc: Raising tax rates can reduce consumption of goods and the demand in general. High levels of taxation can reduce the purchasing power of people and the funds collected can be used by the state for productive purposes to increase supply of goods, thus stablising supply and demand equation. Developmental objectives: Taxation can be used as an effective tool to achieve higher levels of economic development and employment. o Economic development: Economic development is measured in terms of Gross National Product i.e. the output achieved in all the major sections of the economy i.e. Agriculture, Industry and Services. Taxation can be used as a stimulant to any one or all the three sectors by judicious changes in the tax rates. o Capital formation: Indian household savings rate is around 26%, one of the highest in the

world. Savings can be channeled into Investment Avenue through appropriate policy measures. Taxation plays a major role in high level of savings by providing different kinds of exemptions from tax on contribution to provident funds, insurance premium, etc. o Increasing employment opportunities: Small and medium enterprise usually have maximum potential for employment, industrial estates, special economic zones, export oriented parks, etc., have high employment potential. Objectives of reducing inequalities: inequalities are common in several aspects. o Inequalities in economic disparities: Income levels of individuals very wildly in India. It is claimed that rich are becoming richer and the poor are becoming poorer year by year. Taxation can be a powerful weapon in tackling income disparities. o Reduction in regional imbalances: Some regions may become well developed compared to others in a country. Tax incentives and exemptions to start industries in the backward regions can be a good method of dealing with the problem.

Different objectives of taxation, each one of them desirable by itself, can pull in different directions. The state should formulate a comprehensive and cohesive tax system which can balance the different objectives in view of its own requirements and goals. Objectives of Taxes Raising Revenue Regulation of Consumption and Production

Encouraging Domestic Industries Stimulating Investment Reducing Income Inequalities Promoting Economic Growth Development of Backward Regions Ensuring Price Stability

the tax. For instance, if you work in a state with a 5 percent state income tax rate, you must pay 5 percent of the income you earn to the state government. Taxes often impose financial charges based on a certain percentage of the value of income or property being exchanged, but they may also impose flat charges. For instance, the cost of a marriage license in a certain state might be fixed at $100. Collection

the same rate on all individuals, such as sales taxes, license fees and tolls, are often considered regressive, because those with less income typically end up paying a greater proportion of their total income toward such taxes.

Limitations on The Power of Taxation The power of taxation, is however, subject to constitutional and inherent limitations.

Characteristics of Taxes Few people enjoy paying taxes, but most people benefit from taxation in one way or another. Governments impose taxes on various economic activities to raise money to fund their operations. Without taxes, governments would have few resources to devote toward programs such as education, infrastructure and defense. All taxes share a few basic characteristics. 1. Scope

Every tax includes a set of economic activities and individuals to whom the tax applies, and that defines the overall scope of the tax. Taxes can be imposed on many different activities and individuals For instance, a state income tax applies to income earned by individuals within the borders of a certain state. A federal estate tax applies to all individuals in the country who leave estates behind after death. A local sales tax applies to goods and services sold within a certain geographical area, such as a city or county.

Collection describes how governments obtain tax money from taxpayers. Businesses are often required to collect and send taxes to the governments that impose them. For instance, U.S. companies withhold income from employee pay and send it to the Internal Revenue Service (IRS) to cover the income taxes, Social Security taxes and Medicare taxes employees owe. On the other hand, self-employed workers must send income taxes to the government themselves.

Constitutional limitations are those provided for in the constitution or implied from its provisions, while inherent limitations are restrictions to the power to tax attached to its nature.

The following are the inherent limitations. 1. 2. Purpose. Taxes may be levied only for public purpose; Territoriality. The State may tax persons and properties under its jurisdiction; International Comity. the property of a foreign State may not be taxed by another. Exemption. Government agencies performing governmental functions are exempt from taxation Non-delegation. The power to tax being legislative in nature may not be delegated. (subject to exceptions)

Progressive vs. Regressive Taxes 3.

Rates

A tax rate defines how much tax must be paid by those who incur

Taxes are often separated into two categories: progressive and regressive. Progressive taxes are taxes that tend to tax the wealthy more than those with lower income, and regressive taxes tend to impose a greater burden on those with low income. Income taxation in the U.S. is considered progressive, because those with more income face higher tax rates and, therefore, pay a higher percentage of total income toward income taxes. Taxes that impose

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Constitutional limitations.

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Observance of due process of law and equal protection of the laws. (sec, 1, Art. 3) Any deprivation of life , liberty or property is with due process if it is done under the authority of a valid law and after compliance with fair and reasonable methods or procedure prescribed. The power to tax, can be exercised only for a constitutionally valid public purpose and the subject of taxation must be within the taxing jurisdiction of the state. The government may not utilize any form of assessment or review which is arbitrary, unjust and which denies the taxpayer a fair opportunity to assert his rights before a competent tribunal. All persons subject to legislation shall be treated alike under like circumstances and conditions, both in the privileges conferred in liabilities imposed. Persons and properties to be taxed shall be group, and all the same class shall be subject to the same rate and the tax shall be administered impartially upon them. Rule of uniformity and equity in taxation (sec 28(1)Art VI) All taxable articles or properties of the same class shall be taxed at the same rate. Uniformity implies equality in burden not in amount. Equity requires that the apportionment of the tax burden be more or less just in the light of the taxpayers ability to bear the tax burden. No imprisonment for non-payment of poll tax (sec. 20, Art III) A person cannot be imprisoned for non-payment of community tax, but may be imprisoned for other violations of the community tax law, such as falsification of the

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community tax certificate, or for failure to pay other taxes. Non-impairment of obligations and contracts, sec 10, Art III . the obligation of a contract is impaired when its terms and conditions are changed by law or by a party without the consent of the other, thereby weakening the position or the rights of the latter. IF a tax exemption granted by law and of the nature of a contract between the taxpayer and the government is revoked by a later taxing law, the said law shall not be valid, because it will impair the obligation of contract. Prohibition against infringement of religious freedom Sec 5, Art III, it has been said that the constitutional guarantee of the free exercise and enjoyment of religious profession and worship, which carries the right to disseminate religious belief and information, is violated by the imposition of a license fee on the distribution and sale of bibles and other religious literatures not for profit by a non-stock, non-profit religious corporation. Prohibition against appropriations for religious purposes, sec 29, (2) Art. VI, Congress cannot appropriate funds for a private purpose, or for the benefit of any priest, preacher or minister or for the support of any sect, church except when such priest, preacher, is assigned to the armed forces or to any penal institutions, orphanage or leprosarium. exemption of all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes from

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income, property and donors taxes and custom duties (sec. 4 (3 and 4) art. XIV. Concurrence by a majority of all members of Congress in the passage of a law granting tax exemptions. Sec. 28 (4) Art. VI. Congress may not deprive the Supreme Court of its jurisdiction to review, revise, reverse, modify or affirm on appeal or certiorari, final judgments and orders of lower courts in all cases involving the legality of any tax, impost, assessment or any penalty imposed in the relation thereto.