Principles
of Taxation
1.
Session Objectives
By
the end of this session you should be able to:
-explain
taxation;
-explain the
components of tax;
-explain the
forms of tax charges;
-state the
kinds of tax and give at least two (2) examples each;
-explain the
features of good tax system; and
-state the
importance of tax.
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2.
Introduction
Governments all over the world impose taxes on their
citizenry. These taxes are imposed with
different motives. Taxation is one of the systems of governments which most
populace do not understand and hence dislike it. As the late South African reggae star; Lucky
Dube indicated in one of his hit songs, the taxman is the only man people pay
without knowing what they are paying for.
Taxation is a necessary tool for every organized society. In this session we will explain taxation,
identify the kinds of tax and examples, mention the importance of taxation and
take a look at the features of a good tax system.
3.
Explanation
of Taxation
Taxation is the levying of compulsory
contributions by authorities having tax jurisdictions.
We should see governments or society as business entities. As business entity, a government has to
provide some services for the common good or benefit of citizenry. Some of
these services are health, education, road, utilities and security. Of course some of the citizenry can obtain
some of these services at their own cost. However the government has to provide
most of the services at reduced cost or free of charge to majority of the
citizenry. For government to fulfill all
obligations revenue is needed and one of the sources for raising her revenue is
imposing taxes so that the citizenry will help finance the services.
From the definition of taxation take note of the words in bold
which make taxation unique tool.
Tax is compulsory
payment because any one liable to tax is not free to choose whether or not to
pay. For example if rent tax is supposed to be paid by all landlords, no
landlord can choose to pay or not to pay.
Also taxes are imposed through law or by-law and are binding on all
liable persons.
Taxes should be imposed by authorities.
In most cases the authority is government and allied agencies.
The authority imposing tax should have tax jurisdiction. A tax
jurisdiction refers to an area in which a specific set of tax law applies. Some
of the tax jurisdictions are national, metropolitan, municipal and district.
One set of tax laws may apply in one country, metropolitan, municipal or
district and not applies in another.
4.
Components
of Taxation
The components of taxation include impact, incidence, taxable capacity and shifting.
4.1 Impact – The impact of tax is its first point of contact. It refers to the effect on the person who has
the responsibility of paying the tax to the tax authorities. For example, Mr.
Wilson imports goods and pays import duties at the port and clears the goods
and sell them. Mr. Wilson includes the
import tax paid in pricing his goods for his customers. In this scenario Mr.
Wilson has the impact of the import
tax because he paid the tax to the officials at the port.
4.2 Incidence-the incidence of tax is the final resting place of tax. It refers
to the money burden suffered by the person who paid the tax and will not be
able to pass it on to others. For example, Mr. Wilson imports goods and pays
import duties at the port and clears the goods and sell them. Mr. Wilson includes the import tax paid in
pricing his goods for his customers. The customers passed on the tax burden to
the consumer who bought some of the goods. In this scenario the consumer has the incidence of the import tax because he
paid the tax and was not able to pass on the tax burden.
4.3 Taxable capacity- is the limit to accept and absorb tax.
4.4 Shifting of tax- This is the transfer of tax burden from
those who are legally liable to others. Tax shifting enables persons to recoup
some of the reduction in wealth due to the tax.
4.4.1
Forward shifting of tax is the transfer of tax burden from sellers
to buyers through price increment of taxed product.
4.4.2
Backward shifting of tax is the transfer of tax burden from buyers
to sellers through price decrement of taxed product.
5.
Forms of
Taxation Charges
This is how tax liability is determined. There are two (2) forms namely: (a) ad valorem
duty and (b) specific duty.
5.1 Ad valorem duty is where the tax liability is determined by
application of percentage rate to
the value of the goods. For example
Vehicle 20% ad valorem.
5.2 Specific duty is where the tax liability is determined by charging fixed amount per some physical
attributes of the goods. For example weight:
Meat $50 per 100kg.
6.
Kinds of
Taxation
Taxes can be grouped into direct
tax and indirect tax.
6.1 Direct tax is a type of tax which the impact and incidence are on the same
person. The tax levied on a person is not shifted to another person. Examples are corporate tax, gift tax, income
tax and capital gain tax.
6.2 Indirect tax is a type of tax which the impact and incidence are on different
persons. The tax levied on a person is
shifted to another person. Examples are
value added tax (VAT), excise duty and custom duty.
7.
Features of
Good Tax System
7.1 Economy- The cost of enforcing and collecting the tax should be reasonable
in relation to total revenue generated by the tax.
7.2 Equity- The system should be fair to the taxpayers.
7.3 Flexibility- The system has to suit the changing nature and circumstances of
the taxable system.
7.4 Certainty- Taxpayers should be able to determine their tax liabilities with
a good degree of accuracy.
7.5 Convenience-the system should be convenient for the tax authority and the
taxpayers.
8.
Importance
of Taxation
1. Raise
revenue to finance projects and services provided by authorities;
2. Governments
use tax to control certain economic indicators;
3. Used to
limit the use of certain products;
4. Authorities
use tax to redistribute wealth;
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