TAXATION

  TAXATION

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.

                    Rate

                                                                                       Income

                                    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.

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      Rate

                                                                                         Income

                            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.

            Rate

                                                                                               Income

                                          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