A comprehensive note on taxation

Taxation as we all know has so many definitions and I will highlight some definitions while you pick the one that suit you in exam condition. This is an amount or Levi that is impose on the citizen by the government which is very compulsory to be paid.   Taxation is a certain set of money impose on firms, agent or components by the government.

Reasons For Taxation

1. Taxes are imposed by the government to raise revenue

2.  Taxes are imposed to curb inflationary situation in an economy.
3. To reduce the widening gap between the very rich and the very poor ( to reduce in quality too )
4.  To protect infant industry, well established industry are heavily tax by the government in other to protect infant industries.
5.  To check the consumption of luxurious goods or harmful goods. Goods that are label as harmful or luxurious are heavily tax in other to reduce the import of it.
6.  To correct balance of payment problems.  Where a country suffered for balance of payment difficulty due to excess import over export, the government as to tax imported goods heavily more than exported goods in other to stop import of luxurious heavily goods.

Common Terms In Taxation


Incidence of taxation :
this refers to how the real body of tax is distributed among persons in the country.

Incidence of direct taxation : in this case of direct tax,  incidence is always on the person’s that receives income.

Incidence of an indirect tax

(1). When demand is elastic the incidence of tax falls entirely on the seller of the commodity, since as a price higher than the normal price the consumer will seize to buy more of that commodity making the tax body to fall on the sellers or producer.

(2). When the demand is perfectly inelastic the incidence of the tax falls completely off the taxed commodity. Since at a higher price the consumer will still buy lot of that commodity.

Classification Of Taxation

• Direct taxes examples below
Personal income tax
Capital gain tax
Company tax
Royalties, mining rents
Stamps duties, motor vehicle license
Miscellaneous
Death duties
Airport tax

• Indirect taxes examples below
Custom duties
Excise duties
Purchase tax
Sales tax
Licenses

Advantages Of Direct Taxes

1. They are progressive in nature : The percentage levied as direct tax increases with the size of one’s income which is the most ideal form of tax.

2.  Payers find them convenient to pay : This is because they know when,  how and where to pay them.
3.  They are easy to calculate : Once the number of income earners are known, income tax can be calculated.
4.  They are used to control inflation
5.  They are used to redistribute incomes

Disadvantages Of Direct Taxes

• They may cause deflation
• They are difficult to access
• Cases of evasion is high
• Discouragement of hard work
• They discourage savings.

Indirect Taxes

They are taxes levied on locally made imported and exported goods and services

Types Of Indirect Tax

1. Excise duties
2. Import duties
3. Export duties
4 Purchases and sales taxes

Advantages of Indirect Taxe

• They are not easy to evade
• They have less effects
• There is no exemption
• They cause less squabbles
• Indirect taxes yield more revenue

Disadvantages of indirect tax

1. They increase prices of goods
2.  They may cause scarcity of goods
3. They curtail investment
4. They restrict free trade
5. They lower people’s standard of living

SYSTEMS OF TAXATION

Progressive tax system
Proportional tax system
Regressive tax system

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