Categorization Of Taxes In A State

Taxes are compulsory deduction levied by the government or governmental organization upon individual and corporate bodies in order to finance different types of public expenditure in the state. The level of taxation differs from one state to the other and all fall either under direct or indirect form of taxation. The types of taxes imposed in the state is dependent on the taxation policies in the state.

Direct versus indirect taxes

Direct taxes are paid to the state or national government directly by the taxpayer or business entity. Often, indirect taxes are levied on the manufacture and processing of goods as well as the provision of certain types of services and are paid by an intermediary. For these, there are usually input and output taxes that are offset against each other and the difference is what is paid to the government.

Examples of direct taxes

Income, corporate, wealth and capital gains taxes are great examples. Income tax is tax charged to individuals, trusts and any other entity prescribed by law based on their taxable income. The taxable income for a particular period is calculated as the income minus all allowable expenses and exemptions. This tax may be charged as a percentage or on a graduated scale depending on the state. Wealth tax is charged on the net wealth of an individual or other entities who qualify. Wealth tax is not applicable in all states.

Corporate tax is charged on corporate organization whether they are privately or publicly owned. This is usually charged as a percentage of the taxable income which is also calculate by subtracting all allowable expenses from the organization’s gross profit. Capital gains tax is charged on the gains realized upon the sale of property, shares and other money market instruments as prescribed under the capital gains Act.

Examples of indirect taxes

A great example is value added tax that is charged on the value added on goods and services in a state. It is charged as a percentage and in some cases, it is known as turnover tax or Goods and Services Tax. Sales tax is levied when a product is sold to its final user. Import duty is also a type of indirect tax that is charged to an importer of goods or products into a state. These are usually passed on to the final consumer and therefore they contribute to the high cost of goods and services in a certain state. If not checked, they can act as business inhibitors in a state.

The number of taxes that are chargeable to you will depend on your activities. Are you employed or self-employed? Are you in the manufacturing industry or do you export or import good and service into the country? A discussion with a qualified and experienced tax expert will ensure that you calculate your taxable income correctly especially if you do not have a background in accounting or finance. While it is your responsibility to pay tax, it is also good to ensure that you are overpaying as this money could help you finish off your projects, pay for your children’s education and save for retirement.