Introduction to Tax

Tax revenue is the income earned by the government from taxes, such as income tax, value added tax and customs duties, which is collected from individuals and organisations and used to meet public expenditure.

Four objectives of taxation:

1. To raise revenue — To collect funds for government expenses such as administration, defence, education, health and development work.
2. To reduce inequality — To narrow the gap between rich and poor by taxing higher incomes more.
3. To control consumption of harmful goods — To discourage the use of goods like cigarettes and alcohol by imposing high taxes on them.
4. To protect domestic industry and encourage economic growth — To protect local industries by taxing imports, and to promote investment through tax concessions.

Other objectives are price stability and balanced regional development.

VAT and excise duty.

Indirect taxes are levied on goods and services and collected through the price paid by the consumer (e.g., VAT, excise duty, customs duty), unlike direct taxes which are paid directly by the person on whom they are imposed.

Tax is a compulsory payment made by individuals and businesses to the government without any direct return or benefit in exchange. It is levied by the government on income, goods, services, property and transactions to raise public revenue for meeting public expenditure.

Taxes are broadly classified into two types:

1. Direct Tax

A direct tax is a tax whose burden falls directly on the person who pays it. The impact and incidence of the tax lie on the same person, and it cannot be shifted to others. It is collected directly from the income, property or wealth of the taxpayer.

Examples:

• Income Tax – charged on the income of individuals and businesses.
• Property Tax – charged on land and buildings owned by a person.
• Capital Gain Tax – charged on the profit from the sale of capital assets.
• House Rent Tax – charged on income earned from renting out property.

2. Indirect Tax

An indirect tax is a tax whose burden can be shifted to another person. The person who pays the tax to the government (the seller) recovers it from the ultimate consumer by including it in the price of goods and services. Thus, the impact and incidence fall on different persons.

Examples:

• Value Added Tax (VAT) – added to the price of goods and services and borne by the consumer.
• Customs Duty – charged on goods imported into or exported from the country.
• Excise Duty – charged on the production of certain goods like alcohol and tobacco.
• Entertainment Tax – charged on cinema, recreation and similar services.

Conclusion: Direct taxes are progressive in nature and help reduce inequality of income, while indirect taxes are convenient to collect and reach a large number of taxpayers. Both types together form the main source of government revenue.

Permanent Account Number

PAN is a nine-digit numeric identity number issued by the Inland Revenue Department to every taxpayer in Nepal. It is used to track income and tax records of an individual or business.

Value Added Tax

VAT stands for Value Added Tax, an indirect tax levied on the value added to a good or service at each stage of production and distribution.

Canons of taxation are the basic principles that a good tax system should follow so that it is fair to taxpayers and useful to the government.

1. Canon of equity (justice) — Tax should be based on the ability to pay, so that those with higher income pay more and the poor pay less.
2. Canon of certainty — The taxpayer should know clearly how much to pay, when to pay and how to pay. The tax should not be arbitrary.
3. Canon of convenience — The time and method of payment should be convenient for the taxpayer, for example tax deducted at source or paid in instalments.
4. Canon of economy — The cost of collecting the tax should be small compared with the revenue collected.
5. Canon of productivity — The tax should yield enough revenue for the government's needs.

Other canons include elasticity, simplicity and diversity.

A tax whose burden can be shifted to another person.

An indirect tax is levied on goods and services, and its burden is passed on by the seller to the final consumer through the price. Examples: VAT, excise duty, customs duty.