Taxation is a term used to describe the income or profits that individuals, businesses, and governments earn. Every citizen must pay taxes on their income, property, payrolls, etc. These payments are made towards various government departments in exchange for public goods provided by them, including infrastructure development, defense system, public health, education, etc.
Whether you are an employed citizen or a business owner, you will always encounter taxes. It seems like taxes are a big part of our lives. We have to pay taxes on the goods that we buy, property that is being purchased, income earned through our business or profession, etc.
Taxes are also applicable to various services. However, if you are looking for ways to avoid paying taxes, make sure you do not take any advice from online sources, as it is illegal to evade taxes in most countries. Always consult your accountant or tax agent regarding the legal ways to deal with your tax obligations.
There are various terms that one must be aware of in order to understand the process of taxation. The most common ones are income tax, capital gains tax, Value-Added Tax (VAT), corporate tax, and sales tax.
Income tax is a tax imposed on the income of individuals and businesses. The government levies the tax on the income earned in a financial year. The amount of tax paid depends on the income earned and the tax slab rate applicable to that individual or company.
Capital Gains Tax
Capital gains tax is a tax levied on the profits made from the sale of assets such as property, shares, mutual funds, etc. The seller of the asset is liable to pay the capital gains tax. There are different rates for short-term and long-term capital gains.
Long-Term Capital Gains
The profits made on the sale of assets are charged under the 20% tax rate if it falls under this category.
Short Term Capital Gains
Short-term profits on the sale of assets are charged tax at the normal income tax rate.
Value Added Tax (VAT)
The government imposes Value Added Tax on goods and services. Generally 13.5% or 14%, VAT is calculated on the value added to goods and services before being sold to the consumer. It is a multi-stage tax collected by the businesses at each stage of production and distribution.
Corporate tax is a tax levied on the profits of companies. The rate of corporate tax differs from country to country. In India, the corporate tax rate is 30%.
Sales tax is a tax levied by the government on the sale of goods and services. For example, the sales tax rate is usually fixed and differs from state to state in India. Some products have higher sales tax than others.
Importance of Paying Taxes
It is important for each citizen to pay their taxes as these are the only sources of income for the government. Taxes also make it possible to provide public services like infrastructure, healthcare, education, etc. The money collected by the government helps develop infrastructure and other facilities that increase the standard of living in a country.
Where the Taxes Go
The taxes that the citizens pay go into government funds. The fund is used for developmental purposes and to meet other government expenses.
Failure to Pay Taxes
Those who do not pay their taxes can be liable to punishment, including imprisonment and/or fines. In India, the Income Tax Act provides for imprisonment up to 7 years for those who do not file their tax returns. Tax evasion is the illegal act of avoiding or reducing tax payments. Under the law, it is an offense, and those caught evading taxes can be prosecuted.
The other types of taxes include estate tax, gift tax, fuel tax, etc., levied on different income or assets. Taxpayers need to know about these tax types and their respective rates.
So these are some of the most common taxation terms that one should be aware of. It is important to understand these terms in order to be able to file your taxes correctly and pay the right amount of tax. Taxes are an essential part of the government and help develop a country. So each citizen needs to do their bit and pay their taxes.
Taxation can be cumbersome, but almost every citizen in the world must pay their taxes on time. You must understand various tax terms so that there are no discrepancies in your filings or fines imposed on you by the government.