@GooseBumps 25 November 2020

More on Taxation

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. LIKE COMMENT SUBSCRIBE.