Tax is a financial charge or levy imposed by a government on individuals, businesses,

or other entities to fund public expenditures and government functions. It is a

compulsory contribution that citizens and businesses are required to pay, and it is a
crucial source of revenue for the government.

Taxes are an obligatory expense enforced on the individual by the state and central
government. They are one of the government’s most significant income sources,
helping them build our country’s economy and infrastructure. Therefore, as a
responsible citizen, you must pay taxes. However, it is also crucial to know the different
types of taxes in India implemented in the taxation system.

To run a nation judiciously, the government needs to collect tax from the eligible
citizens; paying taxes to the local government is an integral part of everyone’s life, no
matter where we live in the world.

Now, taxes can be collected in any form such as state taxes, central government
taxes, direct taxes, indirect taxes, and much more. For your ease, let’s divide the types
of taxation in India into two categories, viz. direct taxes and indirect taxes. This
segregation is based on how the tax is being paid to the government.

A tax is a mandatory fee or financial charge levied by any government on an individual

or an organization to collect revenue for public works providing the best facilities and
infrastructure. The collected fund is then used to fund different public expenditure
programs. If one fails to pay the taxes or refuses to contribute towards it will invite
serious implications under the pre-defined law.
Direct and Indirect Taxes

Direct taxes are levied on individuals or organizations and must be paid directly to the
government. They include income tax, wealth tax, corporate tax, etc. Indirect taxes are
levied on goods and services and are collected by an intermediary from the person
who bears the ultimate economic burden of the tax. Examples include sales tax, VAT,
and excise tax.
Direct tax is levied on people's income or profits. For example, a taxpayer pays the
government for different purposes, including income tax, personal property tax, FBT,
etc. The burden has to be borne by the person on whom the tax is levied and cannot
be passed on to someone else. Central Board of Direct Taxes (CBDT) governs and
administers the Direct Tax.
Conversely, indirect tax is levied by the government on goods and services. Therefore,
it can be shifted from one tax-paying individual to another. E.g; the wholesaler can
pass it on to retailers, who then pass it on to customers. Therefore, customers bear the
brunt of indirect taxes. The Central Board of Indirect Taxes and Customs (CBIC)
governs and administers indirect taxes.
Progressive, Regressive, and Proportional Taxes

A progressive tax increases as the taxable amount increases, meaning those with
higher incomes pay a higher percentage of their income in tax. In contrast, a
regressive tax takes a larger percentage of income from low-income earners than from
high-income earners. A proportional tax, also known as a flat tax, levies the same
percentage rate of taxation on everyone, regardless of income.
Consumption and Income Taxes

Consumption taxes are levied on the consumption of goods and services and include
sales taxes and VAT. Income taxes are levied on the income of individuals and
businesses.
Corporate and Personal Taxes

Corporate taxes are levied on the profits of businesses, while personal taxes are levied
on individuals' income.

Fiscal policy, which refers to the use of government spending and taxation to impact
the economy, is an important component of economic management. Governments
need it to handle economic issues and accomplish macroeconomic goals including
lowering unemployment, fostering growth, and containing inflation.

The use of taxation and spending by the government to affect the economy is referred
to as fiscal policy. It is a crucial instrument for governments to use in achieving
macroeconomic objectives including job growth, inflation control, and unemployment
reduction. Fiscal policy works by changing the economy’s total demand, which therefore
has an impact on the level of economic activity. To accomplish its desired economic
results, the government can either raise or decrease spending and/or change tax rates.

This is accomplished via a range of policy tools, such as adjustments to transfer

payments, tax rates, and government spending. The timing of implementation, the scope
of the policy response, and the health of the economy are only a few of the variables that
affect how effective fiscal policy is.
Objectives
Fiscal policy aims to achieve several key objectives that support economic stability
and growth. These objectives include:
1. Full Employment

The primary goal of this policy in a developing economy is to achieve and maintain full
employment. Even if full employment is not attainable, the focus is on minimising
unemployment and achieving near-full employment. The state should invest
significantly in social and economic infrastructure to create more job opportunities and
enhance the economy’s productive efficiency.

2. Price Stability

Price fluctuations affect various societal groups, including consumers, labourers,

employees, agriculturists, producers, and traders. Rising prices can negatively impact
the general public. Fiscal policy aims to stabilise prices by addressing price increases
or decreases. This can be achieved through subsidies or tax reductions to mitigate the
impact of rising prices.

3. Accelerating Economic Development

The policy should aim to accelerate economic growth in a developing economy. Proper
use of fiscal measures such as taxation, public borrowing, and deficit financing is
essential to ensure that production, consumption, and distribution are not negatively
affected. These measures should promote overall economic growth, raising national
and per capita income.
4. Optimum Allocation of Resources

Fiscal measures like taxation and public expenditure significantly influence resource
allocation across various sectors. Public spending through subsidies and incentives
can direct resources toward desired areas. For example, tax exemptions and
concessions can attract resources to favoured industries, while high taxation can deter
resources from specific sectors.

5. Equitable Distribution of Income and Wealth

A welfare state should ensure social justice through equitable income and wealth
distribution. Fiscal policy is an effective tool for achieving this goal in developed and
developing countries. A progressive tax system is particularly useful in realising this
objective. Additionally, public expenditure can help redistribute income from the
wealthy to the poorer sections of society.

6. Economic Stability

Economic stability is another critical aim of sound fiscal policy, encompassing the
maintenance of full employment with relative price stability. The policy should curb
inflation and avoid deflation. This policy pursues twin objectives of economic growth
and stability. Measures should boost growth while controlling inflationary pressures. It
also helps stabilise the economy against short-term international cyclical fluctuations,
which often favour developed economies at the expense of developing ones.

7. Capital Formation

Fiscal policy aims to increase investment rates in both the private and public sectors.
Developing countries often have low capital formation rates due to unemployment and
low per capita income, perpetuating the cycle of poverty. It should reduce undesirable
consumption and encourage savings to increase capital formation.

Examples of Fiscal Policy

There are several examples of fiscal policy in action, including:
• Transfer Payments: When times are tough economically, governments may
raise transfer payments like unemployment benefits to help households. This can
 keep consumers from cutting back on their spending and keep the economy from
getting worse.
• Deficit Spending: The government may occasionally participate in deficit
spending, which is when it spends more money than it brings in through taxes.
The economy may benefit from this, but it may also result in an increase in
government debt, which could have long-term repercussions.
• Tax Incentives: To promote investment and the creation of jobs, governments
may provide tax incentives, such as tax reductions for companies that invest in
R&D.
• Increased Government Spending: The government may raise its spending on
public works initiatives, such as infrastructure repairs, to stimulate the economy
during a recession in order to generate jobs and increase consumer confidence.
• Tax Cuts: The government may lower tax rates in times of weak economic
development in an effort to boost investment and consumer spending. This in
turn may encourage economic expansion.
Various Types of Fiscal Policies
Different types of fiscal policies are as follows:

1. Contractionary Fiscal Policy

Contractionary fiscal policy involves cutting government spending or raising taxes,

resulting in tax revenue exceeding government spending. This approach reduces
aggregate demand in the economy, slowing economic growth and alleviating
inflationary pressures.

2. Expansionary Fiscal Policy

Expansionary policy stimulates the economy, especially during recession periods when
national income growth is insufficient to maintain the current living standards of the
population. This approach involves tax cuts and increased government spending to
boost economic growth and reduce unemployment rates. However, this method could
be more sustainable in the long term, as it can lead to a budget deficit. Therefore, it
should be used with caution.
Poverty definition: When a person is unable to get the minimum necessities of life this
situation is known as poverty. Poverty means that the income level from employment is
so low or no employment that basic human needs are not met. Poverty-stricken people
can go without proper housing, clean water, healthy food, and medical attention.
Progress has been made in measuring and analyzing poverty, the World Bank
Organisation is working to identify other indicators and dimensions of poverty. This
includes identifying social indicators to track education, health, access to services, social
exclusion, and vulnerability.
Poverty is defined as a state or circumstance in which an individual or a group lacks
financial means and necessities for a basic level of living. It can also be defined as a
situation in which one’s earnings from work are insufficient to meet fundamental human
requirements.
Poverty, according to the World Bank, is a severe lack of well-being that has various
aspects. Low earnings and the inability to obtain the essential commodities and services
required for a dignified existence are examples.

Understanding Poverty
Poverty is both an individual as well as a broader social problem. On the individual level,
ends are not met which can lead to physical and mental issues. At the societal level,
high poverty can damper to overall economic growth and be associated with problems
like unemployment, crime, urban decay, lack of education, and detrimental health.

Important points related to poverty are:

• The two main dimensions of Poverty are Hunger and lack of shelter.
• Poverty is a condition where one is barely having basic necessities of life. When
parents are not able to send their children to school or a situation where
individuals or families can’t afford medical facilities
• Lack of clean water and sanitation facilities is also one of the conditions of
poverty.
• Lack of regular job to earn or live a regular life with basic necessities of life.
Causes of Poverty
India’s population has been continuously increasing throughout the years. It has
increased at a pace of 2.2 percent per year for the past 45 years, implying that around
17 million people are added to the country’s population each year. This has a
significant impact on the demand for consumer products. The following important
reasons are mostly responsible for poverty:

Low Agricultural Productivity

The agriculture sector’s low productivity is a key source of poverty. Low productivity
can be caused by a variety of factors.
It is mostly due to fragmented and subdivided landholdings, a lack of cash, ignorance
about modern farming technology, the use of conventional farming practices, loss
during storage, and other factors.

Inadequate Utilization of resources

The country suffers from underemployment and hidden unemployment, notably in the
agricultural sector. Low agricultural productivity and a drop in living standards have
ensued as a result of this.

Economic Development at a Slow Rate

India’s Economic inequality has been slow, particularly in the first 40 years of
independence before the LPG reforms in 1991.

Continuous Price hike

The country’s price increases have been consistent, adding to the burden carried by
the poor. Although a few people have profited, the lower-income groups have suffered
as a result, and are unable to meet even their most basic needs.
• Unemployment: It is another element that contributes to poverty in India. As the
world’s population grows, so does the number of people looking for work.
However, the increase in possibilities is insufficient to meet the demand for work.
• Social Issues: In addition to Economic inequality, social factors obstruct India’s
poverty eradication efforts. The laws of inheritance, the caste system, and certain
customs, to name a few, are all obstacles in this respect.
How to reduce Poverty?
Poverty can be reduced with the following steps:
1. Shelters for construction of homes for most needed ones.
2. Educating farmers for production of more foods.
3. Access to free and clean drinking water.
4. Building schools for educating the disadvantaged groups.

Unemployment is a key economic indicator because it signals the ability (or inability) of
workers to obtain gainful work and contribute to the productive output of the economy.
More unemployed workers mean less total economic production.

The unemployment definition doesn't include people who leave the workforce for
reasons such as retirement, higher education, and disability. The term “unemployment”
is often misunderstood, it as it includes people who are waiting to return to a job after
being discharged, yet it does not include individuals who have stopped looking for work
in the past four weeks due to various reasons such as leaving work to pursue higher
education, retirement, disability, and personal issues. Also people who are not actively
seeking a job but do want to work are not classified as unemployed.

‘Unemployment’ is defined as the state of being jobless and actively looking for a job.
Thus, a lot of people are not considered unemployed even though they are not
working. Excluded from the definition of ‘unemployed’ are: people who cannot work
due to a disability, women who perform unpaid domestic labour, children, and those
who stopped looking for a job (because they cannot find one). Furthermore, caretakers
or women who work at home (informally) are not included in employment statistics
either.

The unemployment rate is measured by dividing the number of unemployed people by

labour force (labour force = employed + unemployed but looking for a job). In general,
high unemployment rates often produce negative outcomes for the economy.
Governments regularly collect data on unemployment, so that they can implement
policies to manage the problem.
Causes of Unemployment in India
This can be attributed to various factors, both structural and cyclical. Here are some of
the major causes:

1. Population Growth: The supply of labor surpasses the available job

opportunities, leading to higher unemployment rates.
2. Lack of Skill Development: There is often a mismatch between the skills
possessed by the workforce and the skills demanded by the industries, resulting
in high unemployment rates, particularly among the youth.
3. Slow Industrial Growth: Limited investment in industries can lead to fewer job
opportunities, exacerbating the existing situation.
4. Agricultural Dependence: Overdependence on agriculture, coupled with limited
diversification into other sectors, contributes to high unemployment rates.
5. Technological Advancements: As technology replaces manual labor, certain
jobs become obsolete, leaving workers unemployed.
6. Economic Disparities: Some areas lack adequate infrastructure, industries, and
job opportunities, leading to higher unemployment rates in those regions.
7. Inadequate Education System: The education system in India often struggles
to provide practical skills and job-oriented training, leading to a gap between
education and employment.
8. Informal Sector Dominance: A significant portion of employment in India is in
the informal sector, which lacks job security, social security benefits, and stable
income. Informal sector workers face uncertain employment prospects,
contributing to overall unemployment.
It’s important to note that the causes are multifaceted, and addressing the issue
requires comprehensive strategies that address education and skill development,
promote industrial growth, encourage investment, and create an enabling environment
for job creation.

Consequences of Unemployment
Being unemployed in India can have several consequences on individuals and
society as a whole. Here are some of the common consequences:

1. Financial Difficulties: This leads to a lack of regular income, making it difficult

for individuals to meet their basic needs and sustain a decent standard of living.
2. Reduced Purchasing Power: It decreases personal purchasing power, as
individuals have limited or no income to spend on goods and services.
 3. Social Stigma and Psychological Impact: It can result in social stigma and a
sense of social exclusion. Individuals may face criticism, low self-esteem, and
psychological stress due to the inability to find work.
4. Increased Inequality: The lack of job opportunities and income disparities can
widen the gap between the rich and the poor, leading to social unrest and
dissatisfaction.
5. Brain Drain: Qualified professionals may seek employment opportunities
abroad, causing a loss of skilled workforce and hindering the country’s overall
development.
6. Social Unrest: Frustrations arising from a lack of jobs can manifest in protests,
strikes, and demonstrations, demanding better employment opportunities and
government intervention.
7. Economic Burden: The government has to bear the burden of providing social
welfare programs, unemployment benefits, and job creation initiatives.
Additionally, the loss of productive human capital hampers economic growth and
development.
8.
Government Policies to Address Unemployment
The Government of India has taken several measures:

• One such initiative is the Mahatma Gandhi National Rural Employment

Guarantee Scheme. Under this scheme, unemployed individuals are guaranteed
100 days of employment in a year. It has been implemented in 200 districts
and will be expanded to 600 districts. People working under this scheme receive
a daily wage of 150 rupees.
• To tackle disguised unemployment, where there are more people employed than
necessary, the government has focused on sectors other than agriculture. The
surplus labor from agriculture has shifted to industries like small-scale
manufacturing and emerging service sectors such as biotechnology and
information technology.
• The National Career Service Scheme has been initiated by the government and
includes a web portal called the National Career Service Portal. Job-seekers and
employers can use this platform to search for and update job information. It
covers both private and contractual job opportunities in the government sector.
• The National Rural Employment Programme aims to provide equal job
opportunities to people in rural areas across the country. This helps reduce the
disparity in personal finances between rural and urban areas and prevents
excessive migration to urban areas, which can strain urban management.
• The Deen Dayal Antyodaya Yojana is a scheme implemented by the Ministry of
Rural Development. It aims to support the poor by providing them with skills
recognized by industries. The goal is to alleviate urban and rural poverty by
equipping individuals with the necessary skills to find well-paying jobs.