In general, tax can be defined as a levy or other type of a financial charge or fee imposed by state or central governments on legal entities or individuals. Local authorities like local governments, provincial governments, counties and municipal corporations also have the right to impose taxes. The rates, rules, and regulations of taxation differ from one country to another and they are complex in character.
Tax is a principal source of revenue for a country’s government. The Internal Revenue Service, or IRS, is a government agency of the United States and it is primarily responsible for collection of taxes in that country. A country’s tax laws determine who should bear the tax burden, or who should pay tax. The tax rate is imposed as a certain percentage of the income earned.
Taxation policies play an important role in the financial and economic development of a country. The default or partial payment of taxes attracts penalties. The penalties can be civil or criminal penalties.
A direct tax is a form of tax is collected directly by the government from the persons who bear the tax burden. Taxable individuals file tax returns directly to the government. Examples of direct taxes are corporate taxes, income taxes, and transfer taxes.
An indirect tax is a form of tax collected by mediators who transfer the taxes to the government, and also perform functions associated with filing tax returns. The customers bear the final tax burden. Examples of indirect taxes are sales tax and value added tax (VAT).
There are other types of taxes, which may either be direct tax or indirect taxes, including capital gains tax, corporation tax, consumption tax, inheritance tax, property tax, excise duty, retirement tax, tariffs, wealth tax or net worth tax, toll tax, and poll tax.