Why we pay taxes to the government?

Every person who earns a salary above a certain threshold must pay income tax every month. Even self-employed people and professionals must pay income tax if their income falls in the tax bracket. Similarly, companies pay corporate tax to the government. And then there are a host of other taxes, from customs duties to the goods and services tax, and so on.

No wonder, then, that in every Union Budget presented in February, one of the most anticipated announcements is the change in the tax structure. Sometimes the government obliges with a cut in the tax rate, and at other times, it may do the opposite.

The taxes the government collects provide it with funds to run the country, pay salaries and pensions to government officials, maintain infrastructure such as roads and healthcare, and, most importantly, cover defence expenses to guard the country's borders.

Tax collections form a majority of the Indian government’s revenue. A hole in tax collections can leave a country vulnerable to economic, political and social instability, which can have severe consequences. 

What are the Types of Taxes?

Broadly speaking, taxes in India are divided into two categories—Direct Taxes and Indirect Taxes.

Direct taxes

This is the tax levied directly on individuals, corporations, or other kinds of firms. A direct tax cannot be shifted to someone else and the entity or individual earning the income or owning the asset is responsible for paying it. In India, the Central Board of Direct Taxes looks after the implementation of the rules governing the direct taxes.

Types of direct taxes

Income tax: This is levied on the income earned by individuals, Hindu Undivided Families, associations of persons or partnerships.

Corporate or corporation tax: It is applicable on profit made by all companies in India, whether domestic or foreign.  

Securities Transaction Tax (STT): It is levied on stock market transactions. It can be payable in the hands of either the buyers or the sellers, depending on the type of transaction.

Capital Gains Tax: This is imposed on sale of assets, including shares, mutual fund units and real estate. Its imposition depends on the time for which the asset has been held. Its rate is usually lower than peak income tax rate and the government may also allow some setoff in case of real estate.

Dividend Distribution Tax (DDT): It is levied on distribution of dividend to shareholders. It is taxable in the hands of the recipient.

Indirect taxes

This type of tax is levied on the consumption of goods and services, irrespective of the income of the consumer. The tax is included in the cost of goods or service but not paid directly to the government by the consumer. It is usually a multi-layered tax.

Types of indirect taxes

India brought a unified Goods and Services Tax, or GST, regime in 2017 that subsumed most indirect taxes.

Goods and Services Tax: It is levied on supply of goods and services. It is a multi-stage, destination-based tax with a unified structure across the country.

Customs Duty: This is the tax that has to be paid when certain goods are imported into the country.

Excise Duty: There are certain goods such as liquor and petroleum products that don’t fall under the GST yet. Some of these attract excise duty.

How Does the Government Use Our Taxes?

The tax collected from individuals and businesses is used by the government to run the country and for various purposes vital for the functioning and development. This may include work on public services such as healthcare, education, social security, and defence etc.

Many infrastructure projects, including roads, bridges, and public transportation, are also built or subsidised through tax funds. Many development activities like environmental protection and scientific research are also funded from the tax paid by individuals and corporates.

Even most interest payments on government borrowing are funded through taxes, as are various subsidies. The Central government also transfers a large chunk of the tax collected by it to states. 

Revenue for Public Services, National Defence

The government needs funds for various public services it provides such as healthcare, education, infrastructure, social welfare programmes etc. This revenue comes mainly from taxes that are collected from individuals and corporates. It helps the government uplift the living standards of people and improve public amenities and services that are vital for the quality of life of citizens and the functioning of the country.

Another issue of paramount importance is national security for any country. Defence, in fact, is usually one of the highest spends for many countries and it needs robust tax collection to keep a country safe from external and internal threats.

Economic Stability and Growth

Tax collection has a key role in economic stability and growth. Taxes provide governments funds needed to invest in infrastructure that is the key driver of economic development.

The government builds infrastructure to speed up economic growth. Buoyant tax collection also helps governments keep a buffer for use during economic downturns. Progressive taxation, which means people who earn more pay higher tax, also helps reduce income inequality and helps build an equitable society.

Emergency and Contingency Funds

The central government maintains a Contingency Fund of India. The fund serves as an emergency fund to meet unforeseen expenses. The Contingency Fund is at the disposal of the President of India and is used only in case of an unforeseen expenditure that cannot wait for parliamentary authorization. The fund is replenished through subsequent appropriations from Parliament.

International Relations

The government also uses tax revenue to build and maintain relations with other countries. This includes maintaining embassies and diplomatic staff in other countries, organising or participating in international events and conferences, and lobbying for India’s interests in international or multilateral forums such as the United Nations.

Conclusion

Taxpayers are the backbone of the country and the tax collected from them is what helps the government run the country. We pay taxes to use the facilities provided by the government, welfare of the society and to protect the country. A robust tax system leads to economic and equitable growth of a country.