Definition of Income Tax with Example

 Definition of Income Tax

Income tax is the tax levied on any income within respective government’s jurisdiction. This is imposed both on individuals and businesses. Although, in most of the cases, the rate of income tax is proportional, sometimes it can be progressive and regressive. The income tax that is levied on companies is also called as corporate tax, profit tax and corporate income tax. Individuals are to pay income tax on their total income while companies do pay only on the net operating profit it generates each year. But there are also tax holidays and tax exemption rules in different situations.

Importance of income tax

Taking income tax properly is one of the important tasks of any government. Governments use income tax is different development activities of its territory. As a conscious citizen, everybody should pay income taxes too. Otherwise, it will be tough for government to run the nation smoothly.

For organizations, income tax is a kind of expenses/costs. This is presented in the income statement and thus it is subtracted from net sales revenues to find out net operating income in a particular time period. Firms must exactly calculate amount of income tax that will have to be given to government to be clear about any government interruption of the operation of that firm.

Example: Suppose, Northern Corporation (a fictitious company) has paid $ 217152 worth of income tax in the year 2011 and $ 165284in the year 2010 which depends on the tax rate imposed by the government.