Lesson 1: Meaning and Nature of Taxation

Objectives 1. Define Philippine taxation,

2. Understand the nature and principles of taxation, and
3. Enumerate and explain the situs, objects and
limitations of taxation.

Introduction
Taxation is one of the inherent powers of the sovereign state.
What is inherent power? Why we need to pay taxes? These
are some of the questions that can be answered by studying
Lesson 1 of this module.

Sketchnoting. For 10 minutes, skitch a picture that

represents your idea or understanding about taxation. Sketch
the picture inside the box provided below.
Analysis In 200 words, discuss the meaning behind the picture that you
sketched a while ago.
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
Abstraction ____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
What is Taxation?

Taxation has been defined as the power of the sovereign to impose burdens or charges
upon persons, property or property rights for the use and support of the government to be able to
discharge its functions. It is one of the inherent powers of the state – “power of the sovereign”.

Three inherent power of the state:

Police Eminent
Power Domain

Taxation

What is the nature of the power of taxation?

1. It is inherent in sovereignty – the power of taxation exists independent of any

legislation. There is no need to enact a law to exercise that power because that power
springs at the moment you have the existence of the state. This is inherent because this is
based on necessity. Taxation is the life-blood of government.
2. It is legislative in character - But in the exercise of that power, that power is assigned to
the law-making body. It is not assigned to the judiciary or to the executive branch of the
government. It is assigned to Congress, the law-making body.
3. It is subject to constitutional and inherent limitations – To a certain extent, Congress will
abuse that power. To a certain extent, you have that principle also that the power to tax
involves the power to destroy. Congress may abuse that power given to it by the people
through the electoral process.

The power of taxation is:

o Compulsory
o Comprehensive
o Involuntary

Principles of a Sound Tax System

 1. Fiscal adequacy – means that the sources of revenue, taken as a whole, should be sufficient
to meet the varying levels of expenditure, regardless of business condition and problems
on economic adjustment. The tax laws within the state are sufficient enough to expand
or contract to the needs and expenditures of the state.
2. Theoretical justice – means the power of taxation should be based on one’s ability to
pay. So, one who earns more has the capacity to pay more - “Taxpayer-friendly”.
3. Administrative feasibility – the essence of administrative feasibility is convenience. Taxes,
being burdens, the state should not add more burden by providing convenience not only to
the one who is imposing or collecting the tax but also the one who is going to pay the
tax. This boils down to the principle of convenience and efficiency on the manner of
collection and payment of the tax – “Ability-to-pay principle”.

Why the government should impose tax?

Purpose of
Taxation
 It is a theory developed by supply-side
economist Arthur Laffer to show the
relationship between tax rates and the
amount of tax revenue collected by
governments.

If taxes are too high along the Laffer

Curve, then they will discourage the
taxed activities, such as work and
investment, enough to actually reduce
total tax revenue. In this case, cutting
tax rates will both stimulate economic
incentives and increase tax revenue.

Stages of Taxation Power

1. Levying stage – This is legislative in character. This is the role of Congress – determining
and enacting a tax law. It is Congress which determines the rate and the kind of tax
and the facility or mode of collecting the tax. Once you have a complete law, it is the
executive branch which implements that tax law.
2. Assessment/Collection – Tax Administration
3. Payment of the Tax – Tax Administration

This is what we call tax administration. It is not legislative. It is executive. The

implementation and administration of your tax laws are done or implemented by the executive
branch of the government (BIR, Bureau of Customs). The power to tax is purely legislative in
character. It is up to Congress which will determine the subjects or objects to be taxed, purpose,
the amount of the rate and the manner and means of its collection. Courts cannot question the
motive of Congress or the law-making body, on the levy that is introduced by Congress or the law-
making body.

Situs of Taxation

Situs is a Latin term for “place” or “location”. It refers to the place where taxes are to be paid.

➢ Income tax - this is paid either in the place where the income is earned or the place of
residence of the taxpayer.
➢ Real property tax - this is paid where the property is situated.
➢ Personal property tax - taxes on intangible properties are paid in the place where the
property is located, similar to real property tax. Situs of taxation of intangible properties is
the owner’s domicile. This refers to the place of permanent residence of the owner.
➢ Business and occupation taxes - this is paid in the place where the business or occupation
is located.

Objects of Taxation
 ➢ Individuals who earn a considerable amount of income as a worker, or as a businessman
in partnerships or corporations, including those who inherited a property or given a gift or
donation of a considerable value;
➢ Tangible and intangible properties, whether personal properties (movable properties) that
can be moved or relocated or real properties (immovable properties); and
➢ Transactions, consumptions interests, imports and exports; and privileges

What are the limitations of taxation?

Inherent limitations are rooted in the nature of taxation itself. These are the limitations that
are not affected by changes in the provisions of the constitutions.
✓ The tax revenues must only be used for public purpose.
✓ There should be proper delegation of legislative power to tax
✓ Government entities are exempted.
✓ There are territorial jurisdictions.
✓ There is an observance of international law

Minute Paper. Answer the following questions in just two minutes.

1. In your opinion, what was the most useful idea discussed in

Application lesson 1?

2. For you, what interesting questions remain unanswered about

today’s topic?

Good Job! You have just finish lesson 1. You can now proceed to lesson 2 which
talks about the history, theory, and the legal basis of taxation.