In the name of Allah, the most Beneficent, the most Merciful.
There are three main categories under which a Qadhi (Islamic Judge) can convict a person for a crime and then the penalty for that crime takes place.
For the purpose of this discussion we will look at tazeer. Tazeer is where there is no prescribed punishment from the Shariah. It is left upon the government or the Qadhi to impose a penalty for this crime. Sometimes the Qadhi may apply a stern tazeer such as death to deter people from copying the crime. Tazeer can also include whipping the criminal with sticks and a belt though this should not be more than 39 whips. (Ashraful Hidayah p.736 v.6)
The concept of taking money from people as a punishment is strictly impermissible in Islam. This is known as Tazeer Bil Maal. (Fatawa Darul Uloom Deoband)
But with regards to non Muslims who are living in a Islamic state two types of tax are levied against them. They are:
1. Land Tax (Kharaj)
2. Poll Tax (Jizyah)
The Kharaj is a levy imposed on land. The tax is calculated according to the quality of the land and the possible production worth. This will change the landscape of the Muslim world as much of the productive land remains unused today or in the hands of land owners who inherited vast amounts of land by the departing colonialists.
The jizya tax is applied to all mature, male dhimmi (non-Muslim citizens) who have the means to pay it. Women and children are exempt as are the poor who have no livelihood. The jizya is applied according to the prosperity of the dhimmi. During his time, Saaiduna Umar Bin Khatab Radiallahu Anhu established three different bands of jizya depending on the prosperity of the person. (Hidayah)
The conclusion we can come to is Muslim citizens in an Islamic state are not required to pay tax from their hard earned wages and this will be considered as Tazeer Bil Maal.
However, Muslim citizens residing in non-Muslim countries should abide by the rules and laws of those respective countries. The taxes on the citizens provide a financial source for the government to enable them to deliver services. The government also provides for many facilities and we cannot expect to use these without contributing for the facilities. (See Taqrir Tirmizi of Mufti Taqi Uthmani)
If tax is charged by a government fulfilling the following conditions, then it will be incumbent upon the citizens of that country to abide by the law and pay tax:
1) The tax amount is restricted to the actual need in financing the costs of running the country,
2) The amount is bearable for the citizen/s
3) The method of collecting tax is simple and not troublesome for the masses
4) The tax is used to finance the actual expenses and costs of running the country (and not placed in the pockets of the people in charge)
If a Muslim government taxes people with adherence to the above mentioned conditions then it would be permissible for them to charge tax. A citizen of a Muslim or a non-Muslim country would have to abide by this and pay the tax duly. It will not be permissible to avoid paying tax under any circumstance. (Mufti Muhammad ibn Adam from www.daruliftaa.com & Jadeed Fiqhi Masaail)
With regards to your particular question, if you are required to inform the government of this tax then you should as it is incumbent for Muslims to obey the law of the country. The income insha Allah will be lawful and halal as taxing has got nothing to do with worship but is a device innovated by governments to provide various services to the people and help run the country in an efficient way.
Only Allah Knows Best
Mohammed Tosir Miah
Darul Ifta Birmingham