Tax is a charge of money that imposed by the government for the contribution to state’s revenue. It is based on the income, business profits and cost of goods or services of the people. According to James and Nobes (1997), tax refers to a compulsory levy made by public authorities for which nothing is received directly in return.
2.1.2 Types of Taxes
There are many types of taxes that levied by the government which are federal income tax, individual income tax, corporate income tax, sales tax, service tax, excise tax, property tax, value added tax, tourism tax, custom duty, historical tax, entertainment tax, estate duty, wealth tax, import and export duties.
In Malaysia, we have zakat and jizya. Zakat is a tax paid by Muslims while jizya is a tax paid by non-Muslims. Taxes are commonly categorized by the change in tax rates with respect to income. A tax structure can be progressive, proportional or regressive.
Progressive tax is a tax which the tax rate increases as income increases. The federal income tax falls under progressive tax because its rates tend to rise as taxable income rises. Due to the tax rate increases with income, high-income earners pay higher proportion of their incomes as taxes than low-income earners.
Proportional tax is a tax which the rates tax will not change, no matter how much a taxpayer’s income is. Even when someone’s income increases, he/she will still pay at the same rate. The last one is regressive tax. It is a tax which the rates decrease as income increases.
2.1.3 Classification of Taxes
Direct tax refers to a tax that falls entirely on the taxpayer, cannot be shifted to another party and is paid directly to the government. It is collected by the central government as well as state government according to the type of tax imposed.
Direct tax can help in reducing inflation, reducing inequalities and are considered to be progressive since the tax depending upon the ability of the taxpayer to pay. Direct tax includes income tax, corporate tax, wealth tax, property tax, and import and export duties.
Meanwhile, indirect tax is a tax that can be transferred from one taxpayer to another party, charged on a person who consumes the goods and services and paid indirectly to the government.
Indirect tax may increase inflation and also inequalities and are considered to be regressive since all the taxpayers whether rich or poor have to endure the same burden. Indirect tax includes sales tax, value added tax, custom duty, excise tax and service tax.
2.1.4 Characteristics of Taxes
From the above definitions, we can depict some characteristics of a tax. Here are the characteristics.
1) It is an enforced contribution. Everyone has to pay a tax as it will give benefit to the country. Even though tax is paid willingly, it is actually a compulsory contribution. A tax is levied on the basis of same fixed criteria.
2) It is generally payable in money. All types of taxes will be paid using money by the taxpayer.
3) The amount of tax is not fixed with reference to the exact benefit which a taxpayer receives from public service.
4) It is imposed pursuant to legislative authority; the power to the tax can only be exercised by the law making body or congress.
5) A tax is paid from the taxpayer’s income.
6) The power of taxation is mainly to be used for collecting revenue to the government.