786: Cooking up a storm

2010-12-14T07:47:00.000-08:00

Principles of Taxation

2010-12-13T06:50:00.001-08:00

Principles of Taxation

Definition.

Is a compulsory contribution from individual, entities to support government activities, projects, programs and to support public services need.

Forms of Taxation

There are Two Broad Categories of taxation

A. Direct taxes-tax charged directly from a tax payer and box tax impact and tax b burden fall to the tax payer.

Examples of direct tax

Individual income tax

Corporate tax-tax on the net income of companies, in Tanzania it is 30%

Estate & Gift tax- tax on inherited wealth from one generation to the next

Real Property tax-tax imposed by local government for land ownership

Etc

B. Indirect tax-tax levied on goods and services, and it paid during purchase of goods or consumption of services. Tax paid that can be shifted or pass on to others by the tax payer, meaning that tax burden and tax impact fall on different individuals.

Examples of indirect tax

Custom duties (tariffs)- levied on imported goods

Excise tax- taxes on goods like tobacco, alcohol, telephone services, air travel, luxuries

Sales tax (VAT)- a flat percentage tax on all retail sales of a broad category of goods

Privilege or Fixed tax-tax imposed on any company engaged on business or any person pursuing an occupation or profession

Others ( Gross receipt tax, documentary stamp, amusement tax)

Five Desirable Characteristics of Tax Systems

i. Economic Efficiency

- The tax system should not be distortionary

- The tax system should not interfere with the efficient allocation of resources

ii. Administrative Simplicity

- The tax system ought to be easy and relatively inexpensive to administer

- Reducing administrative cost and increased collection efficiency (BIR)

Flexibility

- Tax system ought to be able to respond easily to changed economic circumstances

Political Responsibility

- The tax system should be designed so that individuals can ascertain what they are paying, and evaluate how accurately the system reflects their perspective (transparency)

Fairness

- The tax system ought to be fair in its relative treatment of different individuals, meaning that individual with the same level of income should be treated equally while those with different level of income should be treated and charged differently.

Horizontal Equity- individuals who are identical should be treated the same, and pay the same taxes

Vertical Equity- individuals who have greater ability to pay or who are better off or receive greater benefits from government services should pay more taxes

III. Approaches to Taxation

Income is the most often used as a basis of taxation, an indirect and imperfect measure of both ability to pay and economic well being. There are two approaches used in taxation namely benefit and ability to pay.

1. Benefit Approach- the payment of taxes is based on the benefits received by the taxpayer from public services

2. Ability to pay approach- support of government functions should be provided by the taxpayers on the basis of their relative abilities to shoulder the tax burden.

a. Three sacrifice doctrines

i. The minimum sacrifice principle- this sacrifice doctrine provides for the imposition of a tax which would entail the lowest possible aggregate sacrifice in the community, i.e., the minimum sacrifice principle is one way of allocating the tax burden in such a manner that the sacrifice of the tax payers taken as a whole would be at the lowest possible level.

ii. Proportional sacrifice doctrine- each individual should contribute his tax share to the government such that the ratio of the utility he foregoes by paying the tax to the total utility of his pre-tax income, is equal to the same ratio with regard to every other individual tax payer

iii. Equal absolute sacrifice doctrine- this sacrifice doctrine is akin to the equal marginal sacrifice principle but, in the former the equality of sacrifice requires that the total utility to be foregone by an individual taxpayers must be equal to what every taxpayer should forego.

IV. Tax Policy and Its Implication

Tax base- This is the item or the unit on which the tax is imposed, for example individual income or company profit.

Rate of tax – the tax rate is expressed in terms of percentage

Deferred income

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Deferred income

Definition

1. General: Income received after the period in which it was earned, such as sales commission that is computed quarterly.

2. Accounting: Income received or recorded before it is earned, and shown in the income statement only when it can be matched with the period in which it is earned.

Deferred income (also known as deferred revenue, unearned revenue, or unearned income) is, in accrual accounting, money received for goods or services which have not yet been delivered. According to the revenue recognition principle, it is recorded as a liability until delivery is made, at which time it is converted into revenue.

For example, a company receives an annual software license fee paid out by a customer upfront on January 1. However the company's fiscal year ends on May 31. So, the company using accrual accounting adds only five months worth (5/12) of the fee to its revenues in profit and loss for the fiscal year the fee was received. The rest is added to deferred income (liability) on the balance sheet for that year.

Deferred income shares characteristics with accrued expense with the difference that a liability to be covered later are goods or services received from a counterpart, while cash is to be paid out in a latter period, when such expense is incurred, the related expense item is recognized, and the same amount is deducted from accrued expenses.

profit margin

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Profit Margin

A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every shilling of sales a company actually keeps in earnings.

Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 1.74% profit margin means the company had a net income of Tshs0.02 for each shs of sales during 2007.

edes george

786: Cooking up a storm

Principles of Taxation

Deferred income

profit margin