What is Income Tax

By definition, income tax is a tax levied by the government on the income of individuals, salaried or self employed and businesses. It is levied on an individuals earning and this is what keeps the country running smoothly.

A person of any age can be liable for income tax, if he has income from pension or savings. Employees as well as self employed people are liable to pay income tax. Salary, profit in business, capital gains, income from house property are some types of incomes which are included to calculate total income.

Countries have varying income tax systems and they can be progressive, proportional or regressive. Progressive or graduated income tax system is applied by many countries where people with higher incomes pay more tax than those with lower incomes. Countries like USA, Canada have progressive income tax systems. In a regressive income tax system, uniform tax is applied to all tax payers and thus it hits harder on those with lower incomes. Proportional tax system, which is also called flat tax rate, is where everyone gives the same share of income in tax. Proportional tax system is considered fair by many and is debatable. Countries may apply different tax systems for different taxes.

Income tax is important because it is a key source of revenue for most countries. The government uses this fund to serve the public and provide facilities. It is used for national programs like foreign affairs, enforcement of law, defense, social security etc. in USA, for example, the tax is used for Medicare and Medicaid programs, through which government takes care of the elderly and individuals who are living below the poverty line and are unable to take care of themselves. 

For individuals, income tax is levied on their total incomes. On individuals, tax is levied on income on the person. Some tax deductions and rebates are available for individuals.The income tax levied on companies is called corporate tax and is usually levied on the net income. The government taxes the companies on the profits that they earn

Income tax is levied at the end of a fiscal year. All the individuals are required to file an income tax return each year to check whether they are eligible for a tax refund or if they owe tax to the government.

Every individual has to declare their income from earnings and profits through the year. Some deductions like donations to charitable institutions, funds are allowed and after deducting this from the total income, taxable income is derived. Simply speaking, tax exemptions reduce the taxable income of an individual.