Tax is a financial fee levied by the state on the legal entity to finance the public expenditure and ascertain the smooth functioning of the economy. Tax is the major source of income for the government to fund expenditures on infrastructure, military, scientific research etc. for the welfare of the society. The major objective behind the imposition of the taxes is to maintain the balance between different sectors of economy i.e. men, material, machine and money through resource allocation and income distribution.

Taxes can be divided as Direct tax and Indirect tax. Direct taxes are the taxes levied on the natural legal entity and are measured as per the net worth of the entity. For example: Personal Income tax or Estate/Wealth tax. Indirect taxes are imposed on the processes such as intermediary transactions like export or import and/or buying and selling of goods and services. For example: VAT(value added tax), Sales Tax, Service tax.

The 18^th century economist Adam Smith summarises four basic principles of taxation in his book The Wealth of Nations: (Source: online)

1. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
2. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.
3. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.
4. Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.

The government ensures the relevant distribution of the taxes so as to avoid chaos by relying on the basic underlyings:

• Horizontal Equity i.e. persons in the same position will be subject to the same tax liability.
• The ability-to-pay principle i.e. the tax imposed will be distributed as per the capacity to bear considering the parameters of income, consumption, inheritance, net worthetc.
• The benefit principle i.e. tax payed will be serving the same purpose for which they have been collected. For instance toll tax payed is for the development of roads, on-road infrastructure etc.
• Economic efficiency i.e. tax system should be neutral towards market and balancing demand and supply without any exploitation of one particular section.
• Clarity i.e. Tax rules and regulations should be simple, unambiguous and comprehensible to both the tax payers and tax collectors
• Stability i.e. Tax laws should be seldom changed and reforms adopted should be orderly and fair.
• Cost effective i.e. The resource for compliance are scarce thus tax assessment and collection should be economical and controlled.
• Convenience i.e. it is the comfort provided by the collectors like by setting generous time limit for tax payment or providing technological support for easy payments etc.

The basic purpose of taxation is to generate revenues for the expenditures of government for the public welfare. The states uses taxation to encourage or discourage certain economic decisions creating a win-win scenario for every section of the society. Thus tax acts as stimulus for the economy which boosts social security, medical facilities, health and education system etc. benefiting the general standard of living of the society.