Taxes constitute a major source of revenue for modern governments. The total revenues of modern states besides tax revenues, non–tax revenues, customs and excise duties etc. also constitute parts of the revenue system. Tax revenues are important and useful as they do not create any liability to the state. Taxation is the only practical means of raising the revenue to finance government spending on the goods and services that most of us demand. Setting up an efficient and fair tax system is, however, far from simple, particularly for developing countries. 

Purpose of Taxation: Taxation is an important part of the national economic development. It serves many purposes, which are as follows: 

1. Pace of Economic Development: Tax policy can affect the pace of economic development and the way the rewards of that development are distributed. 

2. Improvement of Different Sectors: Collection of revenue helps to improve the performance of different sectors of the country. It cannot perform its administrative and development activities without collection of revenue. It is the main objective of tax. 

3. Redistribution of Income: It means the transfer of income from some individuals to others caused by progressive tax. Such redistribution from rich to poor reduces inequality. This can be accomplished by increasingly higher taxes, for example, estate and income tax. 

4. Correction of Externalities: Taxes can correct externalities and other forms of market failure such as monopoly. The purpose of taxes is to enable the government to regulate social welfare activities and to create a market to induce such activities. Also, government spending by using collection of taxes by increasing productive capacity and thus overcoming market failure. For example, health care may lead to a more healthier and productive workforce. 

5. Import Taxes: Import taxes may control imports and therefore help the country’s international balance of payments and protect industries from overseas competition. Indigenous industries may be awarded protection by way of taxation with the help of imposition of high custom duties on foreign goods.

Objectives and Principles of Tax: 

1. Tax as a Percentage of GDP: The current economic turmoil and recession requires special measures from governments. Degrees of taxation must be clearly stated as a percentage of Gross Domestic Product. Substantial tax gains show that there is quite a lot of burden on individuals as well as business houses. There must be an appraisal done before a tax is levied to question the requirement for new regulations and to set up a precise and up-to-date estimate of costs.  

2. Tax Simplification and Stability: Tax legislation and operation should be simple and straightforward to understand and comply with. To avoid too much time consumption in coping up with tax compliance, the volume of legislation must be kept to a minimum. Amendments in tax law, especially those that are opposite to earlier tax breaks or incentives that were the basis of business planning, must be reduced as much as possible.  

3. Openness, Transparency and Accountability: Tax policies should be transparent and without bias, but for a part of a declared discriminatory policy such as one required for promoting new businesses. There is a wider political question about the extent to which it is appropriate to use taxation as an instrument of social policy, for example, penalising smoking by heavy duties or environmental taxes to mitigate climate change.  

4. Certainty: This principle has been given by Adam Smith and explained earlier. The law should be framed in such a way that its interpretation must be the same whosoever analyses it. Authorities must be capable to amend and alter long established practices to which businesses are used to. Taxpayers must have certainty over Revenue authorities’ interrelations. 

5. Tax Competitiveness: The globalisation of business implies that every nation must make sure that its tax rates are competitive and its administration user friendly. Tax is a significant issue and a deciding factor in setting up a business. 

6. The tax base of a nation is more important than its rate. For instance, the headline corporate tax.

7. Efficiency: Efficient tax systems need to be developed so that the amounts due to the government can be collected without any delay, avoidance or evasion. Such efficiency would prevent the build-up of a black economy on one hand, and help the taxpayers in tax payment procedure on the other. 

Hence, a tax system that is rational, equitable and simple needs to be created. To promote growth, a stable revenue stream is needed so that inequalities are reduced and economic sustainability is achieved.