Taxation may be defined as the act or method of imposing a compulsory levy by the government or its agency on individuals and firms or on goods and services.
Tax on the other hands is defined as a compulsory levy imposed by the government or its agency on individuals and firms or in goods and services. It is the major source of government revenue. Government imposes taxes on its citizen in order to meet its numerous expenditures e.g schools,hospitals,payment of salaries.
Element of Tax
Tax base: This is the item or object on which tax is levied. It is a set of incomes ion which tax is imposed. Examples are personal income ,corporate income etc. Tax base is the legal description of an object with reference to which tax applies.
Tax rate: This is the rate of tax to be paid on the tax base or object e.g 10% of tax. For example,if Mr Olu’s income is #400. His tax rate is 10%.The tax to be paid is #40,I.E 10%×400=40.
Features of Tax
It is compulsory and not optional
It is levied by the government or its agencies
It is levied For the common good of the people
It is not a contribution
It has age requirement
Reasons for Taxation
Government levies taxes on income of individuals and firms to generate revenue to meet its expenditure
To discourage consumption of certain goods like alcohol,cigarette which are harmful to people’s health
To correct balance of payments deficit by imposing tax on imported goods to discourage importation
To control inflation by increasing tax in order to reduce the disposable income
To effect the redistribution of income in the economy
It is used to promote the economy by reducing tax imposed on company profit in order to increase output
It is used to stabilise the economy by using it to stimulate demand by cutting tax
Principles of Tax
These are also referred to as Canons of taxation…..
Equality: That is,every individual should pay tax according to his ability. Progressive tax satisfies this canon.
Certainty: Each tax payer should know the actual amount to be paid as tax.
Economy: The total cost of tax collected should be small compared to the total revenue collected
Flexibility: The tax system must be subjected to change to meet changing economy conditions
Convenience: A good tax system must be convenient to the tax payer and the government
Simplicity: Every tax regime should be easy and simple to understand and administer to prevent corruption
Neutrality: A good system should minimise its distortion of relative prices. It should interfere very little with the demand for and supply of commodities
Productivity: That is,tax system should be able to yield enough revenue for the government.
System of Tax
Tax can be progressive,proportional or regressive.
Progressive tax: This is a system of tax which takes more from high income earners than low income earners. That is,pay as you earn (PAYE).The percentage rate increases as income increases e.g personal income tax.
Merits of progressive tax
It is based on ability to pay
It is productive as it generates more revenue tonthe government
It is equitable I.E the high income earner bears the burden of the tax than the low tax payer
It is economical I.E the cost of collecting is low
Demerits of progressive tax
It is easy to evade if the rate is high for some people
It is not justified
It discourages capital formation
It is arbitrary, that is,there is no standard method of fixing rate of tax
It is dis-infective to woo,that is,it affects the welfare of the people
Proportional tax: This is a tax regime in which the same rate is charged every tax payer irrespective of the level of income. The rate is the same regardless ofnthe level of income. The burden of tax is always upon the low income earners.
Merits of proportional tax
It is very simple
It is easy to calculate
It does not affect the pattern of income distribution
Demerits of proportional tax
It is inequality in nature,that is,it affects low income earners
It is less productive,that is,government does not earn much from It
It affects the economy as the consumption pattern of low income earner falls
Regressive tax: This is a system in which the tax rate decreases as the income increases. That is,a higher income earner pays less than low income persons e.g sales tax.
Merits of Regressive tax
It is easy to collect
It is not a disincentive to saving and investment
Demerits of Regressive tax
It takes more from the low income earner
The burden is felt by low income earner
It aggravates income inequality
Classification of Tax
Tax can be classified into direct and indirect.
Direct tax: This is a tax levied directly on income of individuals and business organization by the government . The burden of tax is borne directly by the tax payer which cannot be shifted to any other person. Examples are personal income tax,capital gain tax and education tax.
Types of Direct tax
Personal income tax: This is the tax imposed on income of individuals which depends on the total amount of income of the tax payers
Company tax: Tax imposed on the company’s profit is referred to as company income tax
Education tax: This is the tax imposed on the assessable profit of a company at the rate of 2%.Education tax is imposed to improve education in Nigeria.
Capital gain tax: This is the tax imposed on both individuals and companies on the gain accruing to them from the disposal of properties (assets)
Petroleum tax: This is the tax imposed on companies engaged in the upstream sector of the oil industry
Poll tax: This is a flat or lump sum that is imposed on every individual at the same rate regardless of income. It is regressive in nature.
Merits of Direct tax
It reduces inequalities and ensure distribution of income
It is progressive in nature
It is certain,that is,tax payers are certain of how much they pay
The cost of collecting is very low,that is,economical
It is convenient and simple to understand
It is easy to adjust in line with the economy policy
Demerits of Direct tax
It discourages production of goods
It affects savings of the income earners
It leads to tax evasion
It discourages investment if high tax is imposed on the profit of the company
It is not imposed on all people
It reduces the purchasing power of individual
Indirect tax: These are taxes levied on production and consumption of goods and services. The burden is borne by the final consumers as it is shifted to them. It is indirect because it is assumed that the real incidence will not be borne by the person responsible ,rather it will be passed on to the customers who bears the burden indirectly.
Types of indirect tax
Customs duties: It is divided into import and export duties.
Import duties: These are taxes imposed on goods brought into a country to reduce the amount of goods imported
Export duties: These are taxes levied on goods produced locally and exported to other nation
Value added tax: These are levied on the production and consumption of goods and services. It depends on goods manufactured and sold
Excise duties : They are levied on locally produced goods. It is imposed on goods manufactured in a country. For example,cigarette and beer.
Purchase tax : They are imposed on specified commodity; the tax being a percentage of the wholesale price. Collection is done at the wholesale stage.
Sales tax: This is a tax levied on the sales of goods. It is normally a fixed percentage of total sales of some goods and services.. It is levied on retail sales.
Merits of indirect tax
It is convenient because tax is paid when goods and services are purchased
It is paid by all income groups
It is economical, that is,it involves little cost of collection
It can be used to check production and consumption of harmful and injurious goods
It can ve used to implement economic policies
It is not ease to evade
It is used to protect infant industry
Demerits of indirect tax
It is regressive in nature because the rich and the pro pay the same amount as tax for goods consumed
The cost of collecting is too high ,that is,uneconomical
It may cause inflation if tax is imposed on goods and services is high
The revenue to be generated is uncertain
It affects the level of production if the rate is too high
It is difficult to determine the incidence of tax