Taxation

Posted by Resource Center 21/09/2019 0 Comment(s) Investing, Finance & Economics,Life,Government & Law,Business and Management,Accounting, statistics and Commerce,

TAXATION

A tax is a compulsory payment by individuals and institutions to the government. The government has no obligation to provide services directly to the tax-payer. However, the government use taxpayers’ money to provide public goods e.g. security, education, health services etc which benefit all the citizens.

 

OBJECTIVES ON TAXATION

(i)   To raise revenue needed by the government  to finance the provision of public goods.

  1. Minimize inequality in income distribution i.e. the rich  pay more tax than the poor.
  2. To control inflation.By taxing the citizens you  reduce their purchasing power and therefore control excessive demand.
  3. To discourage the consumption of certain products such as cigarettes or beer which are harmful to the human health.
  4. To discourage importation of certain products and therefore protect the local firms.

 

PRINCIPLES OF TAXATION

These are the characteristics of a good tax system.

(i)  Equity: A good tax system must be fair to all the tax payers i.e. equal tax burden on the rich and the poor .Tax  should be based on one’s ability to pay i.e those with high income should pay more. People with the same income should pay the same amount of tax.

(ii) Convenience: Method of paying tax should be easy and convenient to the tax payer.  For example, tax should be paid at the times when the taxpayers have the money like the payment of PAYE through the check-off system and VAT at the time of purchase. Such method is also convenient to the government as far as tax collection is concerned.

(iii) Certainty: A tax payer should know the exact amount of tax and the exact time he/she should pay. The government must be certain  of the amount of tax it should collect in a given period.

(iv) Economy: A good tax system should ensure that the amount of tax collected is much higher than the administrative cost incurred to collect this tax.

(v) Flexibility: A good tax system is the one that can be easily adjusted so as to accommodate changing economic conditions e.g it should be easy to change the rate of tax without distorting the tax structure.

 

STRUCTURE OF TAXES

(i) Proportional taxes – tax is levied at the same rate(constant) at all levels of income.For example, the first shs.8,000 of salary is levied a tax of 10%,the next shs.8,000 of the same salary is levied a tax of 10%, the next shs.8,000 of the same salary is levied a tax of 10% and so on.

(ii) Progressive taxes: The rate of tax increases with the increase in the level of income e.g the PAYE system .For example ,the first shs.8,000 of your salary is levied a tax of 10%,the next shs.8,000 of the same salary is levied a tax of 15% and so on.

(iii) Regressive: The poor makes a greater sacrifice than the rich i.e the tax take a higher proportion of  the poor person’s income than that of a rich person’s income e.g.the V.A.T. is charged at a uniform rate of  16% to both the poor and the rich.

Types of Taxes

  1. Direct Taxes: These are the taxes based on the income of an individual or profits of a company.  The burden of a tax is felt by the individual or the institution and this burden cannot be transferred to another person.

 

Examples of direct taxes

(i) Pay as you earn levied on salaried workers (P.A.Y.E.)

(ii) Corporation tax where a company pays tax based on its net profit.

(iii) Wealth tax – tax imposed on accumulated savings or physical properties e.g. land, building etc.

(iv) Capital gains tax is the tax levied on the transfer of property from one person to another e.g. if you buy a piece of land you must pay stamp duty because the ownership of land has moved from the seller to you.

 

2. Indirect taxes: They are called indirect because the person who initially pay the tax may pass on either part or all of the tax burden to another person. These taxes are based on consumption or expenditure:  Examples:-

(i) Sales tax e.g. the oil company pay sales tax for every litre of petrol it sell e.g. 1shs. per litre to the government.  The company recovers this  tax from the motorist by charging high fuel pump price.

(ii) Excise duty: The B.A.T. Company pay excise duty to the government because of manufacturing cigarettes locally. The company recovers this tax by charging high prices to the cigarette smokers.

(iii) Import duties – Paid on imported goods. The importer pays the duty at the port but later on transfer this tax burden to the person who buy the imported commodity.

(iv) Export duty

(v) V.A.T.

 

       
 

BAT

Cigarette

Manufacturer

 

Smoker

High Price

 

 

 

 

Government

                                    Excise                                                Tax burden

 

                                   

                                    Duty                                        Transferred

 

                             Impact of tax                                                         Incidence of tax i.e.

                           is on BAT                                                    The person to bear the burden

                                                                                    is the smoker.

 

(Initial burden)                                              (Final tax burden)

Summary

Direct tax describes a tax where the impact of tax and incidence of tax is on the same person.

Indirect tax describes a tax where the impact of tax is on one person and the incidence of tax is on another person.

 

 

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