Samacheer Class 7 Social Science - Tax and its Importance

1. Taxation is a term for when a taxing authority, usually a government, levies or imposes a tax. Taxation is the process by which governments collect money from individuals and businesses to fund public services and expenditures. This revenue is crucial for the functioning of a state, enabling it to provide essential services like infrastructure, education, healthcare, and defense. 2. Proportional Taxation is the method where the rate of tax is the same regardless of the size of the income. In a proportional tax system, everyone pays the same percentage of their income in taxes, meaning the tax burden is distributed evenly across all income levels. 3. Gift Tax is paid to the Government by the recipient of the gift depending on the value of the gift. This tax is levied on the transfer of property or assets from one person to another without full consideration, and it aims to prevent tax avoidance through gifts. 4. Direct tax burden cannot be shifted by taxpayers. Direct taxes, such as income tax and property tax, are paid directly by the individual or organization on whom they are levied, and the burden cannot be passed on to another party. 5. Indirect tax is more elastic. Indirect taxes, like Goods and Services Tax (GST) or customs duties, are generally considered more elastic because their revenue collection can fluctuate more significantly with changes in economic activity and consumer spending. Governments can adjust these taxes more easily to influence economic behavior or respond to fiscal needs.

Canon of Equality
2. …………………. is the taxes should be levied and collected in such a manner that it provides a maximum of convenience to the taxpayers.
Canon of Convenience3. …………………. is the minimum possible money should be spent in the collection of taxes.
Canon of Economy
4. …………………. could be one of the most deserving recipients of tax money.
Education
5. A …………….is paid directly by an individual or organisation to imposing entity.
Direct tax
6. The central Board of Revenue act implemented in the year.
1963
7. The tax is levied on the profit of corporations and companies is
Corporation Tax8. ………………… is a liability to collect tax is that of shopkeeper but the burden of that tax falls on the customer.
VAT
9. ………………… is a kind of tax imposed on the sale, manufacturing, and usage of goods and services.
Goods and Services Tax
10. A government’s ability to raise taxes is called its ………………….
fiscal capacity

Taxes are classified into two main types based on their nature and how they are collected. Direct Tax is a tax that is paid directly by an individual or organization to the government or taxing authority. The burden of direct tax cannot be shifted to another person. Examples of direct taxes include Income Tax, which is levied on the earnings of individuals and corporations, and Wealth Tax, which is imposed on the assets and property owned by individuals. Indirect Tax is a tax whose burden can be shifted from one person to another. It is collected by an intermediary on behalf of the government and then paid to the government. Examples of indirect taxes include Service Tax, which is levied on the provision of services, and Value Added Tax, which is imposed at each stage of production and distribution of goods.

Gift Tax is a form of taxation that is paid to the Government by the recipient of a gift. The amount of gift tax depends on the value of the gift received. This tax is imposed to regulate the transfer of wealth through gifts and to ensure that such transfers are properly documented and taxed. Service Tax is a tax that is raised on the provision of services. It is collected from the service recipients and then paid to the Central Government. Service tax is applicable on various services such as banking, insurance, transportation, and professional services. This tax helps the government generate revenue from the service sector and contributes to the overall tax collection.

Goods and Services Tax, commonly known as GST, is a comprehensive indirect tax imposed on the sale, manufacturing, and usage of goods and services. GST is applied at every stage of the production and distribution chain, from the manufacturer to the final consumer. This tax system was designed to achieve overall economic growth by creating a unified tax structure across the country. GST is particularly designed to replace multiple indirect taxes that existed previously, such as excise duty, service tax, and value added tax. By consolidating these various taxes into a single tax system, GST aims to reduce the tax burden on consumers, improve the efficiency of tax collection, and promote transparency in the economy. The implementation of GST has simplified the tax structure and made it easier for businesses to comply with tax regulations.

Direct Tax and Indirect Tax differ in several important ways. In Direct Tax, the burden cannot be shifted by taxpayers to another person, and the tax is imposed directly on personal income and corporate income. Direct tax does not create inflation pressure in the economy. The impact and incidence of direct tax are the same, meaning the person who pays the tax is also the person who bears the burden. Direct tax is less elastic in nature, meaning the amount of tax collected does not change significantly with changes in income levels. In contrast, Indirect Tax can be easily shifted to another person, as the tax is imposed on various goods and services. Indirect tax has inflation pressure because it increases the cost of goods and services. The impact and incidence of indirect tax are different, as the person who pays the tax to the government may not be the same as the person who ultimately bears the burden. Indirect tax is more elastic in nature, meaning the amount of tax collected can vary significantly based on changes in consumption patterns and economic conditions.

Adam Smith’s principles or camions of taxation still form the basis of the tax structure of a modem state.
Adam Smith’s four Canons of Taxation:
Canon of Equality
Canon of Certainty
Canon of Convenience
Canon of Economy.
1. Canon of Equality:
The government should impose taxes in such a way that people have to pay according to their ability.
It does not mean an equal amount of tax but it means that the burden of a tax must be fair and just.
2. Canon of Certainty:
Certainty creates confidence in the taxpayer’s cost of collection of taxes and increases economic welfare because it tends to avoid all economic waste.
3. Canon of Convenience:
Taxes should be levied and collected in such a manner that it provides maximum convenience to the taxpayers.
It should always be kept in view that the taxpayers suffer the least inconvenience in payment of the tax.
4. Canon of Economy:
Minimum possible money should be spent in the collection of taxes.
The collected amount should be deposited in the Government treasury.

There are three main types of taxation based on how the tax rate changes with income levels. Proportional Taxation is a method where the rate of tax remains the same regardless of the size of the income. Under proportional taxation, the tax amount realized will vary in the same proportion as that of income, meaning if income doubles, the tax also doubles. Progressive Taxation is a system where the rate of tax increases with the increase in income of the person. This means that individuals with higher incomes pay a higher percentage of their income as tax compared to those with lower incomes. Progressive taxation is designed to ensure that the tax burden is distributed fairly based on the ability to pay. Regressive Tax is a tax applied uniformly that takes a larger percentage of income from low-income earners than from high-income earners. This type of taxation places a heavier burden on those with lower incomes and is in opposition to a progressive tax. Regressive taxes are often considered less fair because they disproportionately affect poorer sections of society.

Importance of Tax: Taxes are crucial because governments collect this money and use it to finance the following social projects.
Health:
Without taxes, government contributions to the health sector would be impossible.
Taxes go to funding health services such as social healthcare, medical research, social security, etc.
Education:
Education could be one of the most deserving recipients of tax money.
Governments put a lot of importance in the development of human capital and education is central in this development.
Governance:
Governance is a crucial component in the smooth running of country affairs.
Poor governance would have far-reaching ramifications on the entire country with a heavy toll on its economic growth.
Good governance ensures that the money collected is utilized in a manner that benefits citizens of the country.
Other important sectors are infrastructure development, transport, housing, etc.
Apart from social projects, governments also use money collected from taxes to fund sectors that are crucial for the wellbeing of their citizens such as security, scientific research, environmental protection, etc.
Some of the money is also channeled to fund projects such as pensions, unemployment benefits, childcare, etc,

Taxes are classified into two types. They are:
1. Direct Tax:
A Direct tax is paid directly by an individual or organisation to an imposing entity.
Eg: Incometax, WealthTax,etc.
2. Indirect Tax:
IndirectTaxisataxwhoseburdencanbeshiftedtoothers. LSIOTT
Eg: Servicetax,Valueaddedtax,etc.
Direct Tax:
Gift Tax:
It is paid to the Government by the recipient of the gift depending on the value of the gift.
Estate Duty:
It is charged from success or of inherited property.
It is not desirable to avoid payment of taxes
WealthTax:
It is imposed on the property of individuals depending upon the value of the property.
Indirect Tax :
Service Tax:
It is raised on the provision of Service.
This tax is collected from the service recipients and paid to the Central Government.
Sales TaxorVAT:
It is an indirect tax on the sale of goods because the liability to collect tax is that of the shopkeeper but the burden of that tax falls on the customer.
Goods and Services Tax(GST):
Goods and Services Tax is a kind of tax imposed on the sale, manufacturing, and usage of goods and services.
This is applied to achieve overall economic growth.
GST is particularly designed to replace indirect taxes.

The levying of taxes aims to raise revenue to fund governing or to alter prices in order
to affect demand.
Some of these include expenditures on economic infrastructure like transportation, sanitation, public safety, education, health-care systems, etc., military, scientific research, culture, and the arts, public works, public insurance, etc., and the operation of government itself.
When expenditures exceed tax revenue, a government accumulates debt. A portion of taxes may be used to service past debts.
Governments also use taxes to fund welfare and public services. These services can include education systems, pensions for the elderly, unemployment benefits, and public transportation.
Energy, water, and waste management systems are also common public utilities.
The purpose of taxation is to maintain the stability of the currency, express public policy regarding the distribution of wealth, subsidizing certain industries or population groups, or isolating the costs of certain benefits, such as highways or social security.
7th Social Science Guide Tax and its Importance Additional Important Questions and Answers