Tax is money that individuals and businesses pay to the government to fund public services like education, healthcare and public transportation.
Taxes are important: Through taxation, citizens both fund and gain access to free primary education and healthcare services. In essence, the taxes we pay directly contribute to the wellbeing of society.
Moreover, taxation helps reduce economic disparity. A progressive tax system ensures that those with a high income pay proportionately more than those with a low income.
Corporate versus income
Businesses, such as limited liability companies, pay what’s called corporate tax. That’s because businesses are considered separate legal entities from their owners.
To work out the taxable income, you take the revenue from sales of goods and services minus business expenses. The rate you have to pay varies from country to country.
When you’ve subtracted both costs and taxes from your business income, the remaining sum is called profit. You can reinvest your profit in the business, or give it to shareholders by paying dividends.
Individuals pay what’s called income tax. If you’re self-employed—for example a freelancer, contractor, self-employed, or a sole trader—and you haven’t set up a business, your income from selling goods and services is combined with your personal income. Examples of personal income are salaries and interest on your personal bank deposits. You have to pay income tax on the total amount.
Both these types of taxes are considered direct taxes, since they are taxes imposed on individuals and businesses.
What is consumption tax?
Consumption tax is an indirect tax; It’s added to the sale of goods and servicer, for example on an invoice you send to a client. t’s usually called VAT or GST, depending on which country you’re operating in.
The rate varies from country to country, and some goods and services should not be taxed, they are what’s called exempt or excepted.
See also: What do I do about tax on my invoice?