Importance of Taxes on the Indian Economy

Importance of Taxes on the Indian Economy

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States all over the world have relied heavily on taxes as their primary source of revenue for centuries, and India is no exception. The central and state governments determine the country's structured tax system, which employs progressive and proportional taxation based on income and other factors. The money that the government gets from taxes is called tax revenue. This money can be used for a wide range of things, like building roads, railways, bridges, dams, and other kinds of infrastructure. Public education, defense, and civil service are just a few examples. The primary purpose of taxes is to assist the government in achieving its development objectives.

As of 2018-19, India had a tax-to-GDP ratio of 10.9%, which is alarming considering that the average for OECD member states is around 34%.A high tax-to-GDP ratio indicates that the government is able to effectively manage its spending without excessive borrowing. Additionally, developed nations typically have high ratios. The low numbers could be a result of lower service tax collections, relatively high GDP growth, and widespread income tax evasion among large corporations and the upper echelons of society.

Based on how it is implemented, taxes fall broadly into two categories:>

(a) Direct Taxation: Individual and corporate income taxes, wealth taxes, capital gains taxes, perquisite taxes, agricultural taxes, and property taxes are all examples of these taxes that are imposed on individuals or organizations. The fundamental significance of such taxes is that they are paid directly to governments and account for a sizable portion of collected revenue. Income tax is a tax that must be paid by any entity whose income is greater than the limits that are exempt from taxation. The taxpayers' relative wealth and incomes also play a role in determining the tax rates

(b) Indirect taxation: These taxes, which are levied when goods and services are utilized or purchased, are collected by the government in an indirect manner. Customers pay them to service providers, who then have to pay the same amount to the government or local organizations. The Value Added Tax, excise duty, customs fees, service tax, and sales tax were all previously included in the system. With the Goods and Services Tax Bill's implementation in July 2017, many of these were combined into a single tax system with five tax rates: 0%, 5%, 12%, 18%, and 28%. The importance of these taxes lies in the manner in which local bodies or governments collect and use them, which can have a significant impact on a nation's development, despite the fact that their methods of collection may vary.

Direct Taxation Is Critical - One of the primary sources of revenue for the government is direct taxation. By regulating all disposable incomes, it also has an effect on inflation, demand, and supply in the economy. This regulation has the greatest impact on luxury goods and services; consequently, tax rates need to strike a balance between providing funds for administrative purposes, limiting inflation, and leaving enough money available for spending. Individuals and businesses will be encouraged to invest in the Indian economy and generate usable capital by deductions on certain services like insurance and loans. The economy will be more stable as a result of this, and stakeholders will have greater financial security as a result. Also, the government will have a larger budget to spend on developing the nation's infrastructure, as well as its natural, man-made, and human resources, as a result of an increase in capital entering the country. This will result in an increase in revenue and, in turn, an impact on tax collection.

Why indirect taxation is so important - Since less money is spent on raw materials, there will be less money left over for taxes; indirect taxes have been instituted to ensure that resources are utilized effectively by individuals and businesses. Besides, Profits will rise as a result of lower production costs, and the economy will grow as a result of this healthy competition. In addition, this makes it easier for consumers to raise their standard of living by offering them a wider range of options that are tailored to their requirements. Furthermore, the majority of retailers, manufacturers, and service providers will attempt to recover taxes on initial expenses in the sales price itself, so consumers ultimately bear the tax burden. This is why taxes of this kind are important because they encourage businesses to run their operations as efficiently as possible.

To sum up - The numerous ways in which their regulation influences the ebb and flow of economic activity demonstrate the significance of taxes. Governments will have sufficient funds to make investments in enhancing the overall quality of life within their borders if the tax system is properly regulated and payments are collected in an effective manner. Individuals and businesses alike are able to operate with greater freedom and financial security when certain investments and services, like life insurance, are eligible for tax deductions.