Introduction to Income Tax
Income tax refers to a tax which is levied on the income earned by individuals as well as business firms. There are various tax systems existing with varying degrees of tax incidence. The nature of income tax can be proportional, progressive, or regressive.
Types of Income Tax
The different types of income tax include:
- Personal tax
A personal or individual income tax is the one levied on the total income of an individual. The personal tax also involves some permissible deductions. The basis for collecting personal income tax is ‘pay-as-you-earn’, with trivial corrections which are made soon after the ending of a tax year. These corrections are done in one of the two ways –
- Payments made to the government as a compensation for taxpayers who haven’t paid any tax during the year.
- In the form of tax refunds from the government for those who have overpaid the taxes.
Income tax systems often proffer deductions thereby reducing the total tax liability by lessening the total taxable income. Moreover, these also allow losses of one income form to be counted against another.
- Corporate tax
Corporate tax can be defined as a direct tax which is levied on the companies’ profit and generally includes capital gains of a company. Corporate expenses related to capital expenditures are commonly fully deductible from tax.
A payroll tax can be explained in two forms – employer and employee payroll taxes. Employee payroll taxes are taxes the ones withheld by the employers from the employees’ pay. Employer payroll taxes, on the contrary, are paid from the employer’s own funds, either in the form of fixed charge per employee or as a proportion of each employee’s pay.
The inheritance tax, death duty, and estate tax are the ones arising after an individual’s death. As per international tax law, there is a difference between an inheritance tax and an estate tax, the former taxes the beneficiaries of the estate unlike the latter which taxes the personal representatives of the deceased.
- Capital gains tax
This type of income tax is levied on profits earned through sale of capital assets. In various cases, the capital gain amount is treated as an income and is subject to trivial rate of income tax.