The levying of taxes aims to raise revenue to fund governing or to alter 'prices in order to affect demand. States and their functional equivalents throughout history have used money provided by taxation to carry out many functions.' Some of these include expenditures on economic infrastructure like, transportation; sanitation, public safety, education, health-care systems, etc., military, scientific research, culture and the arts, public works, public insurance, etc. and the operation of government itself. A government's ability to raise taxes is called its fiscal capacity. When expenditures exceed tax revenue, a government accumulates debt. A portion of taxes may be used to service past debts. Governments also use taxes to fund welfare and public services. These services can include education systems, pensions for the elderly, unemployment benefits, and public transportation. Energy, water and waste management systems are also common public utilities. The purpose of taxation is to maintain the stability of the currency, express public policy regarding the distribution of wealth, subsidizing certain industries or population groups or isolating the costs of certain benefits, such as highways or social security.

(i) Direct Tax:
A Direct tax is the tax whose burden is directly borne by the person on whom it is imposed, i.e., its burden cannot be shifted to others. It is deducted at source from the income of a person who is taxed.
Income tax is a direct tax because the person, whose income is taxed, is liable to pay the tax directly to the Government and bear the burden of the tax himself.
Corporation Tax: Corporation Tax It is levied on profit of corporations and companies. It is charged on royalties, interest, gains from sale of capital assets located in India, fees for technical services and dividends.
Wealth Tax: It is imposed on property of individuals depending upon the value of property. The same property will be taxed every year on its current market value.
Gift Tax: It is paid to the Government by the recipient of gift depending on value of gift.
Estate Duty: It is charged from successor of inherited property. It is not desirable to avoid payment of taxes. They are levied directly on income and property of persons, who pay directly to the government.
(ii) Indirect Tax:
On the other hand when liability to pay a tax is on one person and the burden of that tax shifts on some other person, this type of tax is called an indirect tax. Indirect Tax is a tax whose burden can be shifted to others.
Service Tax: It is raised on provision of Service. This tax is collected from the service recipients and paid to the Central Government.
Sales Tax or VAT: It is an indirect tax on sale of goods because liability to collect tax is that of shopkeeper but the burden of that tax falls on the customer. The shopkeeper realizes the tax amount from the customer by including it in the price of the commodity that he sells.
Excise Duty: It is paid by the producer of goods, who recovers it from wholesalers and retailers. This tax in India is levied by the Central Government.
Entertainment Tax: The state governments charge such tax on every transaction related to entertainment. Some examples are movie tickets, video game arcades, stage shows, exhibitions, amusement parks, and sports-related activities.
Goods and Services Tax (GST): Goods and Services Tax is a kind of tax imposed on sale, manufacturing and usage of goods and services. This tax is applied on services and goods at a national level with a purpose of achieving overall economic growth. GST is particularly designed to replace the indirect taxes imposed on goods and services by the Central and State.

Without taxes, governments would be unable to meet the demands of their societies. Taxes are crucial because governments collect this money and use it to finance under the following social projects.
1. Health: Without taxes, government contributions to the health sector would be impossible. Taxes go to funding health services such as social healthcare, medical research, social security, etc.
2. Education: Education could be one of the most deserving recipients of tax money. Governments put a lot of importance in the development of human capital and education is central in this development.
3. Governance: Governance is a crucial component in the smooth running of country affairs. Poor governance would have far reaching ramifications on the entire country with a heavy toll on its economic growth. Good governance ensures that the money collected is utilized in a manner that benefits citizens of the country.

There are four types of Taxation:
1. Proportional Tax
2. Progressive Tax
3. Regressive Tax and
4. Degressive Tax
1. Proportional Taxation is a method, where the rate of tax is same regardless size of the income. The tax amount realized will vary in the same proportion as that of income. If tax rate is 5% on income, Mr. X getting an income of Rs.1000 will pay Rs.50, Mr. B will be getting an income Rs.5,000 will pay tax of Rs. 50. In short, proportional tax leaves the relative financial status of taxed persons unchanged.
2. Progressive Taxation is a method by which the rate of tax will also increase with the increase of income of the person a case of progressive taxation if a person with Rs.1000 income per annum pay a tax of 10% (i.e) Rs.100, a person with an income of Rs.10,000 per annum pays a tax of 25% (i.e) Rs.2,500 and a person with income of 1 lakh per annum pay the tax of 50% that is Rs.50,000.
3. Regressive taxation: A regressive tax is a tax applied uniformly, taking a larger percentage of income from low income earners than from high income earners. It is in opposition to a progressive tax.
4. Degressive Taxes which are to mildly progressive, hence not very steep, so that high income earners do not make a due' sacrifice on the basis of equity, are called degressive. In degressive taxation, a tax may be progressive up to a certain limit; after that it may be charged at a flat rate.

Adam Smith's principles or canons of taxation still form the basis of the tax structure of a modern state:
Adam Smith's four Canons of Taxation:
1. Canon of Equality
2. Canon of Certainty
3. Canon of Convenience
4. Canon of Economy
1. Canon of Equality: The government should impose taxes in such a way that people have to pay according to their ability does not mean equal amount of tax but it means that the burden of a tax must be fair and just.
2. Canon of Certainty: Certainty creates confidence in the taxpayers cost of collection of taxes and increases economic welfare because it tends to avoid all economic waste.
3. Canon of convenience: Taxes should be levied and collected in such a manner that provides a maximum of convenience to the taxpayers. The taxpayers suffer the least inconvenience in payment of the tax.
4. Canon of Economy: Minimum possible money should be spent in the collection of taxes. Collected amount should be deposited in the Government treasury.