Taxation

TAXATION

Taxation is the act of imposing a compulsory levy by the government or its agency

on individuals and firms or on goods and services.

REASONS WHY GOVERNMENT IMPOSE TAX IN THE COUNTRY

1. TO RAISE REVENUE FOR THE GOVERNMENT

Tax is used to raise revenue for government expenditure. Tax is a major source of

government revenue. Money is required for the provision of essential services and

for the financing of capital projects by the government.

2. TO REDISTRIBUTE INCOME

Tax is used to re-distribute income thereby reducing inequality of income among

people in the country.

Reduction of income inequality can be achieved through a progressive taxation (i.e

Pay As You EarnPAYE). It can also be further reduced by spending tax money on

social services such as Health, Education and Social welfare which are designed to

benefit the poor more than the rich.

3. TO REDUCE THE PRODUCTION AND CONSUMPTION OF COMMODITIES

CONSIDERED HARMFUL OR LUXIRIOUS.

Taxation is used to reduce the production and consumption of commodities which

are considered harmful or luxurious. Heavy indirect taxes impose on such

commodities lead to high selling prices. This could discourage the consumption of

such commodities. Example; Alcohol and Cigarette.

Luxury goods include certain brand of cars. Example; Jeeps (hummer jeep) etc and

some clothing material.

4. AS AN ANTI-INFLATIONARY DEVICE

Taxation could be used as an anti-inflationary device. To remedy inflation, the

government would increase direct tax without increasing its expenditures. For

instance, an increase in personal income tax would reduce people’s disposable

income. This would help to reduce the amount of money in circulation thereby

remedying inflationary pressure within the economy.

5. TO PROTECT INFANT INDUSTRIES

Infant industries are young industries or newly established industries that are at the

developing stage.

Such newly established industries cannot compete effectively with the long-

established foreign firms.

To protect them, high tariffs are set up against the importation of goods similar to

those produced by the infant industries.

6. TO CORRECT ADVERSE BALANCE OF PAYMENT

Too much importation could lead to a balance of payment deficit. Importation of

foreign goods could be restricted by the use of high import duties. This would

reduce demand for such imported goods thereby conserving foreign exchange.

7. Taxes are used by the government to promote economic growth. This can be

achieved by imposing a lower rate of tax on company profits that are ploughed

back into business. The government can also encourage economic growth by

pursuing generous investment policies. It can also grant some industries tax

concessions and encourage the production and purchase of home- made

goods.

8. Tax is used to stimulate recovery from a trade depression. During a trade

depression, aggregate spending is low. This lead to a high level of unemployment.

The government can therefore decrease direct taxes in other to increase people’s

disposable income. This will make demand for goods and services to rise thereby

generating increased production and employment.

9. Tax is used to run and maintain general administration. The administrative

machinery of a country may collapse if there is no money to maintain it. Tax

therefore form one of the sources of such money.

10. Tax is also used for defense purpose. It contributes part of the money used in

maintaining a country’s armed forces.

TYPES OF TAX

(a) Direct Tax

Direct taxes are taxes levied on the income of individuals, firms and on their

property. Such income would include wages, salaries, profits, rent and interest.

The burden of direct taxes falls directly on the payers. Eg. personal income tax,

company tax, poll tax, capital tax, capital gain tax and expenditure tax.

1. Personal income tax: This is tax levied on the income of an individual usually

during a period of one year. In assessing personal income tax, allowances are

made on the income before the tax. These include personal allowance, wife’s and

children’s allowances, life assurance premium, provident fund scheme, etc. The

remaining part of income which is then taxed is called taxable income, while the

remaining part of income after deduction of tax is called disposable income.

Personal income tax is usually progressive. The rate of tax increases as income

increases.

2. Company tax: This is tax levied on the net profit of companies. Allowances are

also made on the net profit of the company being taxed. Allowances are usually

given for capital expenditure by companies. Company profit tax yields plenty of

revenue for the government in advanced countries, but it is still to yield such

revenue in developing countries. This is because the number of taxable industries

is relatively small. Also, in an attempt to encourage industrialization, the new firms

are granted tax holidays which exempt them from payment of tax up to a period

of four to five years.

However, in general, company tax is easy to collect because companies can

easily identified, and most of them maintain an accurate financial accounts.

3. Poll tax: This is a flat tax usually imposed on those with low incomes. For example,

each adult could be asked to pay per year as tax. People who pay poll tax are

usually exempted from the payment of personal income tax. It is a regressive form

of taxation because each payer pays the same amount irrespective of his income.

In developing countries, it is sometimes difficult to collect this type of tax.

Many people evade it. They run away whenever they hear that tax collectors are

around.

4. Capital tax: This is tax levied on the assets or property of individuals including the

assets of the deceased. Such property may include cars, personal houses, land,

etc.

5. Capital gain tax: A capital gain tax is a tax levied on the gains or profits derived

from the sale of land and capital assets. If someone buys land or any other assets

and resell it at a profit, the gain is taxed in some countries. The higher the gain,

the higher the tax derived from it.

6. Expenditure tax: This is tax levied on the part of a person’s income which is

actually spent. It is not a common type of taxation. The tax is used to encourage

saving.