108 LearnersLast updated on June 12th, 2025
Taxes
Taxes are compulsory payments levied by a government entity on corporations or individuals. The payments are used to fund various government activities for the welfare of people. It is important to learn about taxes as they are the lifeline of a country's economy.
What are Taxes?
The mandatory amount that people or organizations pay to the government to run the country is called tax. Local, regional, and national governments impose taxes.
Tax payer and tax collector: A person paying tax to the government is known as taxpayer. The one who collects on behalf of the government is known as tax collector.
Formula: There are different types of taxes, and each type is calculated using a different formula. For example, income tax is calculated by using the formula,
Tax = (Taxable Income - Deductions) x Tax Rate.
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Types of Taxes
There are two types of taxes based on the type of payment: direct and indirect taxes. Direct taxes are the taxes paid by individuals directly to the government such as income tax, wealth tax, gift tax, capital tax, etc. The taxes which are indirectly collected by the government are known as indirect taxes such as sales tax, entertainment tax, and customs duty.
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Direct Tax |
Indirect Tax |
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Income Tax: Direct tax levied by the government based on the total earnings of individuals or businesses |
Value Added Tax: Tax levied on the sale of services and goods |
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Wealth Tax: Direct tax levied by the government based on the individual’s net worth |
Octroi Tax: Local tax imposed on goods while entering a city for sale, use, or consumption |
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Capital Tax: Tax levied on individuals or businesses based on their capital or assets |
Service Tax: Here, the service provide collects the tax from their customers and pay them to the government |
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Gift Tax: Direct tax imposed by the government when an individual or entity transfers money or assets to another person or entity |
Custom Duty: Tax imposed on exported and imported goods. |
Tips and Tricks to Master Tax
Understanding the concept of taxes is essential for students, but learning about them can get boring at times. To make the learning fun and engaging, let’s learn a few tips and tricks.
- Understand the basics: To master tips and tricks, it is essential to learn the basics of taxes.
- Keep track of the deductions and credits
- For international students they can qualify for tax exemptions under tax treaties, so they should understand the tax residency status.
- If a student is doing freelance work or part-time, they can get an exemption by tracking the expense.
Importance of Tax
Taxes play a major role in our real world as it is collected by the government from individuals and organizations. Let’s see how it is important to pay taxes.
- For loans, it is significant to submit a copy of our tax returns from the last few years.
- The government uses the tax we pay for development and welfare projects, defense expenditures, salaries of state and government employees, public health, public education, etc.
- When applying for a visa, many foreign consulates ask for income tax returns.
Common Mistakes and Ways to Avoid Them in Tax
Tax is one of the most significant topics as it plays a major role in our lives. Understanding how taxes work can go a long way in making us financially secure and successful. Likewise, it is also important to avoid common mistakes when it comes to taxes. Here, a few mistakes that can be avoided are mentioned for your reference:
Mistake 1
Not filing the taxes
Students assume that their income is low, so they don't need to file a tax return. Instead of assuming, they should verify it on the official websites to know whether they need to file it or not.
Mistake 2
Not reporting all earnings
Students usually forget to file income from all sources such as part-time, internships, gig work, and so on. When filing taxes, students should report all their earnings, so try to keep track of all their incomes.
Mistake 3
Missing the filing deadline
When filing income, missing the deadline is a common thing which can further lead to penalties and interest charges. To avoid it, try to set a reminder for the deadline and try to file it as soon as possible.
Mistake 4
Not deducting education expenses
Not using the tax benefits properly. Students can claim the advantage of tax deductions and credits related to education. To claim it, save all the documents related to it.
Mistake 5
Responding to tax scams
Students are often targeted by scammers, especially those who carry out tax scam. Students should be vary of this and understand that the government will never demand tax payment through phone calls or emails.
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Tax Examples
Problem 1
A book is sold for $50 with a 5% tax rate. Calculate the tax amount.
The tax amount is $2.50
Explanation
The price of the book (S.P) = $50
The tax rate = 5%
Tax amount = S.P. × tax rate / 100
= 50 × 5 / 100 = 2.5
So the tax amount = $2.5
Problem 2
A meal costs $25, and the restaurant charges 8% tax. How much is the tax?
The amount of tax on the meal is $2
Explanation
The price of the meal (S.P) = $25
The tax = 8%
Tax amount = S.P. × tax rate / 100
= 25 × 8 / 100 = 2
The amount of tax on the meal = $2
Problem 3
A student pays a $5 tax on a $100 book. What is the tax rate?
The tax rate is 5%
Explanation
The price before tax is $100
The tax amount = $5
Tax rate = tax amount/price before tax × 100
= 5 / 100 × 100 = 5%
The tax rate is 5%
Problem 4
A gaming laptop has a 10% tax rate and a pre-tax price of $1500. Find the total price.
The total price of the laptop = $1650
Explanation
The pre-tax price of the laptop = $1500
The tax rate = 10%
Tax amount = S.P. × tax rate / 100
= 1500 × 10 / 100 = 150
The amount of tax on the laptop = $150
So, the total price of the laptop = Tax amount + pre-tax price
= 1500 + 150 = 1650
Thus, the price of the laptop = $1650
Problem 5
The price of a backpack is $45 with an 8% tax. Find the tax amount and total price.
The tax amount is $3.6 and the total price of the backpack is $48.6
Explanation
The tax amount = S.P × tax rate / 100
Here, S.P. = $45
Tax rate = 8%
= 45 × 8 / 100 = 3.6
The tax amount is $3.6
The price of the backpack is S.P + tax amount
= 45 + 3.6 = 48.6
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FAQs on Tax
1.What are taxes?
2.What are the two types of taxes?
3.How do you calculate taxes?
4.What is VAT?
5.Why is it important to pay taxes?
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Dr. Sarita Ghanshyam Tiwari
About the Author
Dr. Sarita Tiwari is a passionate educator specializing in Commercial Math, Vedic Math, and Abacus, with a mission to make numbers magical for young learners. With 8+ years of teaching experience and a Ph.D. in Business Economics, she blends academic rigo
Fun Fact
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