In my previous article I dealt on Taxation and its types in which one of them was Direct tax. Now let us look at another type of tac which is Indirect tax. I will also look at the different systems of taxation. Read and be inspired.
(a) Indirect Tax
Indirect taxes are taxes levied on goods and services. The incidence of taxation on
commodities does not fall directly. Sellers bear the initial burden of tax before
shifting them to final consumers.
Indirect tax can be avoided by not purchasing the commodities taxed. However,
the consumer who purchases the commodity does not usually know the amount
he is paying as tax.
Examples of indirect taxes are as follows:-
1. Custom Duties:
They are usually of two types:
(a) Import duties; - Import duties are taxes imposed or levied on goods brought into a country from other countries. They are on the other hand called tariffs.
They are usually paid initially by the importers.
(b) Export duties; - This is tax that is levied on goods sent out to other countries. A
tax of that nature is usually paid by producers or exporters at the exporting
country.
2. Excise Duties:
These are taxes levied on certain locally manufactured goods. They are imposed
on such commodities as cigarettes, alcohol, petrol etc.
Excise duties are not an important source of government revenue. This is because
a number of manufacturing industries is relatively small and newly established
industries are granted tax holidays by government.
3. Sales Tax:
This is a tax levied on the sale of a commodity. This type of tax is collected at the
wholesale stage or retail and passed on to final consumer in form of high prices. It
is paid on the sale of commodities such as petrol and agricultural export produce.
4. Purchase Tax:
This is a type of tax levied on the purchase of certain consumer items such as
cars, radios, television sets, cosmetics, etc. The tax is usually collected at
wholesale stage.
However, purchase tax is based on the value of the commodity under
consideration.
Advantages of Direct Taxes
The followings are advantages of direct taxes.
1. They are progressive in nature.
The percentage levied as direct tax increase with the size of person’s income
which is the most ideal form of tax.
2. The incidence of direct taxes is easy to ascertain. The tax payer bears the final
burden since the tax is paid from his income.
3. They are used to control inflation.
Increase in direct taxes in the period of inflation will contribute immensely in
reducing the volume of money in circulation thereby controlling inflation in a
country.
4. The collection of such tax is easy while the tax itself is relatively cheap.
5. They are used in redistributing incomes. The progressive nature of direct taxes
help to redistribute income of an individual; the more income the individual earns,
the more taxes he/she pays.
6. They are easy to calculate. Once the number of income earners are known,
income tax can be calculated.
7. Payers find them convenient to pay. This is because they know when, how and
where to pay them.
8. They arose civic consciousness. Payers of direct taxes are aware that they are
doing so with every amount of sense of responsibility.
Disadvantages of Direct Taxes
The following are the disadvantages of the direct taxes.
1. They may cause deflation. When the taxes are high, they may reduce the volume
of money in circulation than available goods and services thereby causing
deflation.
2. They discourage savings. The left over after paying the taxes may not encourage
any form of saving.
3. They may bring about personal squabbles. This can be attributed to the fact that
their collection involves personal contact.
4. Direct taxes reduce people’s purchasing power. This is because the more the
taxes are paid, the income of workers are reduced.
5. They are difficult to assess. Where it concerns profit tax, some firms declare false
profits.
6. The tax on company profits tends to reduce investment.
7. Discourages hard work and enterprise.
Advantages of Indirect Taxes
Advantages of indirect taxes include the following;-
1. They are used to correct deficit balance of payment. This is done by increasing
import duties and lowering both export an excise duties.
2. Indirect taxes form an important source of revenue for the government. A lot of
revenue is derived from indirect taxes and contributes to social and economic
development.
3. They are used to protect infant industries. This is true of tariffs. Import taxes raise
the prices of foreign goods. This helps to discourage unfavorable competition with
locally produced goods.
4. Where unemployment is high, indirect taxes yield more revenue.
5. It has a wider coverage than direct tax.
6. It is not easy to evade. Consumers pay as they consume the commodities.
7. It is not disincentive to work.
8. It is used to prevent dumping.
9. They can be used to discourage the production and consumption of harmful and
non-essential items. Items which are either regarded as harmful or luxurious are
heavily taxes to discourage the demand for them. Consequently their production
will fall.
10. Indirect taxes are easy and cheap to collect. Once a consumer purchase a taxed
commodity, he pays the tax. The tax is not evaded by the buyer of the commodity.
Example, custom duties.
Disadvantages of Indirect Taxes
Disadvantages of indirect taxes include the following:
1. They increase prices of goods. This is because the amount paid as tax is shifted to
the consumers in form of high prices of goods.
2. They may cause scarcity of goods. This is because high tariffs may discourage
people from important goods while the excise duties may also lead to stoppage of
further production of certain goods.
3. Indirect taxes may cause inflation. This may be the aftermath of increase in prices
and scarcity of goods.
4. Indirect taxes are regressive in nature. This is because both the rich and poor buy
goods on which these taxes are imposed from the same source and at the same
price.
5. They curtail investments. High excise, import and export duties reduce the profits
of businessmen thereby reducing their investment propensities.
6. They lower people’s standard of living. This is because they increase the price of
goods.
7. They restrict free trade. Import and export duties do not allow free trade to take
place.
SYSTEMS OF TAXATION
The systems of imposing both direct and indirect taxes are as follows:
1. PROGRESSIVE TAXATON
A progressive tax taxes a larger percentage of income from people with larger
incomes. A good example is the P.A.Y.E. (pay as you earn) system of taxation
which has been in vogue in Nigeria since many years ago. For example, if Miss
Ngozi earns ₦10,000 a month and pays 10% of her income as tax while Miss
Adobi earns ₦2,000 a month and pays 2% as tax, this is progressive. Progressive
taxation is usually the system adopted with the taxation of personal incomes in
Nigeria. The graph shown below could be used to represent progressive taxation.
2. REGRESSIVE TAXATION:
A regressive tax taxes a larger percentage of income from people with lower
income. Indirect taxes, for instance which are fixed sums added to the prices of
things purchased by consumers irrespective of their income are regressive. In
regressive taxation, the richer may ultimately pay less tax on income. For
instance, if Miss Chinwe earns 1000 and pays 50 as tax while Miss Chioma
earns 2000 and pays as tax, this is regressive because Miss Chinwe pays a
tax rate of 5 while Miss Chioma pays a tax rate of . Therefore, a regressive tax
aggravates inequality of income distribution.
Regressive tax can be demonstrated by a graph shown below.
3. PROPORTIONAL TAXATION
A tax is proportional when all tax payers pay a fixed rate or percentage of the
value of their taxable objects. The rate of tax is the same for all incomes.
Suppose the government decrees that every taxable person should pay of his
income as tax, a worker earning ₦1,500 per annum will therefore 10 of ₦1,500
that is ₦150 while another worker earning ₦3000 per annum will pay 10 of
₦3000 that is ₦300.
Even though the later pays a larger amount of money than the former, the rate
of taxation or payment (10) is the same or proportional. The rate of taxation
remain the same as the tax base or income increases.
Proportional taxation can be demonstrated by a graph shown below.
Please I am very sorry that my graphs couldn't show please just read the important parts. Maybe next time I will attach pictures.
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