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Objectives Of Taxation Homework Help

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Objectives Of Taxation

The basic objective of taxation is to raise resources for the State.  Different objectives of taxation may be summed up as under:

  • Objective of raising revenue:  The basic and primary objective of taxation is raising revenue.  Enormous amount needed by modern governments for National defence, creation of infrastructure and social upliftment schemes make regular and systematic resource mobilization compulsory.
  • Regulatory objectives: Taxation performs an important regulatory role in different socio economic aspects.
    • Regulatory consumption: State can discourage consumption of harmful and undesirable goods by levying prohibitive rates of tax.
    • Regulatory production:  Production may be encourages by exempting new industries from tax for someone, reducing tax on capital goods, increasing tax on imported goods to encourage local production, etc.
    • Regulating imports and exports:  Imports of undesirable products can be curbed by imposing prohibitively high import duties.  Exports can be encourages by cutting duties and taxes on exports.
    • Regulating effects of inflation, depression etc:  Raising tax rates can reduce consumption of goods and the demand in general. High levels of taxation can reduce the purchasing power of people and the funds collected can be used by the state for productive purposes to increase supply of goods, thus stablising supply and demand equation.
  • Developmental objectives:  Taxation can be used as an effective tool to achieve higher levels of economic development and employment.
    • Economic development:  Economic development is measured in terms of Gross National Product i.e. the output achieved in all the major sections of the economy i.e. Agriculture, Industry and Services.  Taxation can be used as a stimulant to any one or all the three sectors by judicious changes in the tax rates.
    • Capital formation:  Indian household savings rate is around 26%, one of the highest in the world.  Savings can be channeled into Investment Avenue through appropriate policy measures.  Taxation plays a major role in high level of savings by providing different kinds of exemptions from tax on contribution to provident funds, insurance premium, etc.
    • Increasing employment opportunities:  Small and medium enterprise usually have maximum potential for employment, industrial estates, special economic zones, export oriented parks, etc., have high employment potential.
  • Objectives of reducing inequalities:  inequalities are common in several aspects. 
    • Inequalities in economic disparities:  Income levels of individuals very wildly in India.  It is claimed that rich are becoming richer and the poor are becoming poorer year by year.  Taxation can be a powerful weapon in tackling income disparities.
    • Reduction in regional imbalances:  Some regions may become well developed compared to others in a country.  Tax incentives and exemptions to start industries in the backward regions can be a good method of dealing with the problem.

Different objectives of taxation, each one of them desirable by itself, can pull in different directions.  The state should formulate a comprehensive and cohesive tax system which can balance the different objectives in view of its own requirements and goals.




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