Bulls n' Bears

Investment Risk That Taxation May Cause

Investment is the major pillar of capitalist economy. Investment can be done on bonds, debentures, shares and many more types that are specific to your country. Each investment has its own risk level. Some are less risky to invest in while some are more risky. For example shares are the most risky thing to invest as this may have both high return and high loss.

There are different types of risks involved in investing in a capitalist economy. One such risk is Risks due to Taxation which can lead to less profit made by the company. The taxation risk is such a risk that is suffered by the whole industry and not by an individual company.

You must have known there are two types of taxes levied by the government. One is direct taxes and the other is indirect taxes. These taxes are generally paid by the consumers and the people who earn money. But there is another form of tax that is a corporate tax that the companies need to pay the government.

Sometime in the need of raising money from the market government levy some taxes on the industry or removes some tax subsidy that government gives to promote the business or promote export of the product. When there is an increase in the tax the price of the products increases which reduces the customer base.

Less people go for the product and as there are close substitutes in the market it is quite possible to do so. That decreases the profit level. Even when the company does not increase price the profit level decreases as the cost of producing the good goes high.

In any scenario the gain from the investment that you make loses a part of its value as now company does not have much money left to expand their business. This in long term reduces the income of the company and the share price drops due to which you can lose money. This is call the risk due to taxation in investment which has a long term impact.