Taxation Part 3

If you missed the first two parts, you can read them here by clicking Part 1 and Part 2.

TYPES OF TAX
There are two major types of tax. These are direct tax and indirect tax.

DIRECT TAX
Direct tax as the simply implies refers to the type of tax imposed directly on income of individuals or organizations by the government or its agencies. Such income would include wages, salaries, profits, rents and interests. The burden of direct tax is borne by the payers. The tax payers are usually aware of the payment of such tax.


Types of direct tax
1. Personal Income Tax: This is the type of tax levied on the income of an individual, usually during a period of one year. In this type of tax system, individual are granted certain rebates, such as whether married, number of children, etc and the balance of the income is then taxed. The rate of this tax increases as the income of the individual increases.





2. Company Tax: Company tax, also called corporate tax, is the tax levied on the profits made by a company. Allowance is given to companies in the area of expenditure and the balance, called net profit is taxed.

3. Poll Tax: This is the type of tax operated on flat rate basis, usually imposed on the income of some individuals. The tax is said to be regressive of his income.

4. Capital Tax: This type of tax is levied on properties or capital assets. Such properties may include land, cars, personal houses, etc. When tax is levied on the properties or assets of a dead person, such capital tax is called death duty. It is levied on the person who inherits such property.

5. Capital gains Tax: This is the type of tax levied on the gains or profits derived from the sale of land and capital assets. An increase in the value of capital assets is referred to as capital gain.

6. Expenditure Tax: This is the type of tax levied on the part of a person's income which is actually spent. It is not a very common tax in developing countries but it is used to encourage savings.

INDIRECT TAX
This is the type of tax which is imposed or levied on goods and services. The producers or sellers bear the initial burden of tax before shifting them to the final consumers in the form of higher prices. Unlike direct taxes, the tax payers under indirect taxes are usually no aware of the amount being paid for such tax.

Types of indirect taxes
1. Custom duties of tariffs: This can be divided into import and export duties. 
Import duties are tax levied on goods imported or brought into the country from other countries. They are paid initially by the importers. The main purposes are to generate revenue for the government, reduce importation of non-essential commodities, to protect infant industries and also to prevent dumping of goods.
Export duties are taxes levied on goods sent out or exported to other countries. such tax is paid by the exporter.

2. Excise duties: These are taxes levied on certain goods produced within the country, that is, locally manufactured goods.

3. Sales tax: It is the type of tax levied on on the sale of certain commodities.

4. Purchase tax: This is the type of tax levied on certain consumer commodities such as cars, T.V sets. The tax is usually collected at wholesale stage. It is based on the value of goods under consideration. Luxury goods attract higher purchase tax than essential goods.

5. Value added tax (VAT): This is the type of tax imposed on goods and services at each stage of production. The burden of taxation is finally borne by the final consumers. VAT is used to generate revenue for the government.

Classification of Indirect tax
1. Ad valorem tax: It is a form of indirect tax imposed on goods in accordance with their respective values and at specific percentage of tax. Luxury goods attract high percentage of tax than essential goods.
2. Specific tax: In this type of indirect tax, a fixed sum is imposed or levied per unit of a commodity, irrespective of its value, e.g. equal percentage of tax is imposed on both luxury and essential commodities.





SYSTEM OF TAXATION
Taxation especially, direct tax can be classified according to the following systems. These are:
1. Progressive Tax: This is a form of tax in which the rate of tax increases as the income increases. This type of tax is graduated in such a way its rate rises according to the level of income or wealth of the tax payer. A good example of a progressive tax is the Pay As You Earn (P.A.Y.E) system operated in Nigeria.

2. Proportional Tax: This is a form of tax in which the rate of tax is the same irrespective of the level of income or wealth. In order words, it is a system of taxation in which the payers pay the same percentage or proportion of their income as tax. A good example of proportional tax is the company tax in which companies are required to pay a fixed percentage of their profits as tax.

3. Regressive Tax: This is a tax system where the tax rate decreases as the income increases. In this case, the higher the income of a consumer, the lower the rate of tax. In this system, a poor person pays higher proportion of his income than a rich person. A good example of a regressive tax is the poll tax.