FM-AA-CIA-15 Rev.

0 10-July-2020

Study Guide in BAC 103 TAXATION: Income Taxation Module No._1_

STUDY GUIDE FOR MODULE NO. _1_

Module 1: INTRODUCTION TO TAXATION

MODULE OVERVIEW

Taxation not only pays for public goods and services; it is also a key ingredient in the
social contract between citizens and the economy. https://www.doingbusiness.org/ en/data/
exploretopics/paying-taxes/why-matters.
Thus, a need to study Taxation in order to know its theories and concepts that could be
properly applied in the fair computation of taxes so that we can contribute in the government
mandate to produce income that will sustain its projects and services.

MODULE LEARNING OBJECTIVES

At the end of this module, you should be able to demonstrate mastery of the following:
1. Concept of taxation and its necessity for every government
2. Lifeblood doctrine and its implication to taxation
3. Theories of government cost allocation
4. Inherent power of the State
5. Scope of the taxation power
6. Limitations of the taxation power
7. Stages of taxation
8. Concept of situs in taxation
9. Fundamental principles surrounding taxation
10. Various escapes from taxation
11. Concept of tax amnesty and condonation

LEARNING CONTENTS (title of the subsection)

● 1 Introduction to Taxation Nature and Concept

● Definition of taxation
Taxation is an inherent power of the State to enforce a proportional contribution from its subjects:
persons, properties or rights to generate revenues for public purposes.

The people provide funds to the government that finance the government projects and public services for
the benefit of its people. This mutuality of support between the people and the government is referred to
as the basis of taxation.

To learn more, read Banggawan (2017) on pages 1-2.

LEARNING ACTIVITY 1

REFLECTION ON LEARNING
● In your own understanding how do you define taxation. Illustrate.
● Deadline of submission

LEARNING CONTENTS (title of the subsection)

● The lifeblood Doctrine

Taxes are the lifeblood of the government, and their prompt and certain availability are an imperious need.
Upon taxation depends the government’s ability to serve the people for whose benefit taxes are collected.
(Vera vs. Fernandez)

PANGASINAN STATE UNIVERSITY 1

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in BAC 103 TAXATION: Income Taxation Module No._1_

● Theories of cost allocation

The inherent right of the government to impose income taxation is based from the following basic
principles:

▪ Benefit received theory

The government imposes taxes, and in return the taxpayers receive benefits from the State In the form of
services, safety, and protection to life, property and liberty. There is reciprocity or a symbiotic relationship
between the State and its inhabitants.

▪ Ability to pay theory

● The Ability to pay theory presupposes that taxation should also consider the taxpayer's ability to pay.
Taxpayers should be required to contribute based on their relative capacity to sacrifice for the support of the
government.
Aspects of the Ability to Pay Theory

1. Vertical equity
Vertical equity proposes that the extent of one's ability to pay is directly proportional to the
level of his tax base.

For example, A has P200,000 income while B has P400,000. In taxing income, the government
should tax B more than A because B has greater income; hence, a greater capacity to contribute.

2. Horizontal equity
Horizontal equity requires consideration of the particular circumstance of the taxpayer.

For example, both A and B have P300,000 income. A is single without a child while B is married
with four children. In taxing income, the government should tax A more than B because A has a
greater capacity to contribute since he has jo dependents to support. B has less capacity to
contribute considering the support requirements of his dependents.

● The inherent powers of the State

The government sustains itself by the power of taxation, secures itself and the well-being of its
people by police power, and secures its own properties to carry out its public services by the
power of eminent domain.

1. Taxation Power is the power of the State to enforce proportional contributions

from its subjects to sustain itself.

2. Police Power is the general power of the State to enact laws to protect the well-
being of the people.

3. Eminent Domain is the power of the State to take privately for public use after
paying just compensation.

● The scope of taxation.

The scope of taxation is widely regarded as comprehensive, plenary, unlimited and supreme.

● Limitations of the taxation power

o Inherent limitations
1. Territoriality of taxation -
2. International comity
3. Public purpose
4. Exemption of the government
5. Non-delegation of the taxing power

o Constitutional limitation
1. Due process of law
2. Equal protection of the law
3. Uniformity rule in taxation
4. Progressive system of taxation
5. non-imprisonment for non-payment of debt or poll tax

PANGASINAN STATE UNIVERSITY 2

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in BAC 103 TAXATION: Income Taxation Module No._1_

6. Non-impairment of obligation and contract

7. Free worship rule
8. Exemption of religious or charitable entities, non-profit cemeteries, churches
and mosque from property taxes.
9. Non-appropriation of public funds or property for the benefit of any church,sect
or system of religion.
10. Exemption from taxes of the revenues and assets of non-profit, non-stock
educational institutions
11. Concurrence of a majority of all members of Congress for the passage of a law
granting tax exemption
12. Non-diversification of tax collections
13. Non-delegation of the power of taxation
14. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
15. The retirement that appropriates revenue, or tariff bills shall originate
exclusively in the House of Representatives
16. The delegation of taxing power to local government units.
LEARNING ACTIVITY 2

Illustrate in your simplest but concise form of understanding each limitations of

taxation power.

To learn more, read Banggawan (2017) on pages 6-12.

LEARNING CONTENTS (title of the subsection)

● STAGES OF THE EXERCISE OF TAXING POWER

1. Levy or imposition

This process involves the enactment of a tax law by Congress and is called
impact of taxation. It is also referred to as the legislative act in taxation.

2. Assessment and collection

The tax law is implemented by the administrative branch of the
government. Implementation involves assessment or the determination of
the tax liabilities of taxpayers and collection. This stage is referred to as
incidence of taxation or the administrative act of taxation.

● Concept of Situs in taxation

Situs is the place of taxation. It is the tax jurisdiction that has the power to levy
taxes upon the tax object. Situs rules serve as frames of reference in gauging
whether the tax object is within or outside the tax jurisdiction of the taxing
authority.
What is the situs rule on the following: business tax, income tax on
services, situs on sale of goods, property tax, situs on personal tax?
● Other fundamental doctrines

1. Marshall Doctrine – “The power to tax involves the power to destroy”. Taxation power
can be used as an instrument of police power.

2. Holme's Doctrine- Taxation power may be used to build or encourage beneficial

activities or industries by the grant of tax incentives.
3. Prospectivity of tax laws
Tax laws are generally prospective in operation. An ex post facto law or a law
that retroacts is prohibited by the Constitution.
4. Non-compensation or set-off
Taxes are not subject to automatic set-off or compensation. The taxpayer
cannot delay payment of tax to wait for the resolution of a lawsuit involving
his pending claim against the government

PANGASINAN STATE UNIVERSITY 3

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in BAC 103 TAXATION: Income Taxation Module No._1_

5. Non-assignment of taxes
Tax obligations cannot be assigned or transferred to another entity by
contract.
6. Imprescriptibility in taxation
Prescription is the lapsing of a right due to the passage of time. When one
sleep on his right over an unreasonable period of time, he is presumed to be
waiving his right. The government's right to collect taxes does not prescribe
unless the law itself provides for such prescription.
7. Doctrine of estoppel
The error of any government employee does not bind the government.
8. Judicial Non-interference
Generally, court are not allowed to issue injunction against the government's
pursuit to collect tax as this would unnecessarily defer tax collection. This rule
is anchored on the Lifeblood Doctrine.
9. Strict Construction of Tax Law
When taxation laws are vague, the doctrine of strict legal construction is
observed.

● DOUBLE TAXATION
Double taxation occurs when the same taxpayer is taxed twice by the same tax jurisdiction
for the same thing.
● ESCAPES FROM TAXATION
Escapes from taxation are the means available to the taxpayer to limit or even avoid the
impact of taxation

Categories of Escape from Taxation

A. Those that result to loss of government revenue :
1. Tax evasion, also known as tax dodging,refers to any act or trick that tenss to
illegally reduce or avoid the payment of tax. In income taxation, this can be
perpetrated by undue understatement of income overstatement of expense or non-
declaration of income.
2. Tax avoidance, also known as tax minimization, refers to any act or trick that
reduces or totally escapes taxes by any legally permissible means. This may be done
by selecting tax options allowed by the law which minimizes tax liability or by
careful tax planning to reduce tax expenses.
3. Tax exemption, also known as tax holiday, refer to the immunity privilege or
freedom from being subject to tax which others are subject to. Tax exemptions may
he granted by the Constitution, law or contract.

B. Those that do not result to loss of government revenue:

1. Shifting- This is the process of transferring tax burden to another taxpayers.

Forms of shifting
a. Forward shifting – this is the shifting of tax which follows the normal
flow of distribution (i.e. from manufacturer to wholesalers,retailers to
consumers). Forward shifting is common with essential commodities and
services such as food and fuel.
b. Backward shifting – This is the reverse of forward shifting. Backward
shifting is common with the non-essential commodities where buyers have
considerable markeg power and commodities with numerous substitute
products.
c. Onward shifting – this refers to any tax shifting in the distribution
channel that exhibits forward shifting or backward shifting.

Shifting is common with business taxes where taxes imposed on business revenue
can be shifted or passed-on to cistomers.

PANGASINAN STATE UNIVERSITY 4

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in BAC 103 TAXATION: Income Taxation Module No._1_

2. Capitalization – this pertains to the adjustment of the value of an asset

caused by changes in tax rates.
For instance, the value of a mining property will correspondingly decrease
when mining output is subjected to higher taxes. This is a form of backward
shifting of tax.

3. Transformation – this pertains to the elimination of wastes or losses by the

taxpayer to form savings to compensate for the tax imposition or increase in taxes.

● TAX AMNESTY AND TAX CONDONATION

Tax Amnesty
Amnesty is a general pardon granted by the government for erring taxpayers to give
them a chance to reform and enable them to have a fresh start to be part of a society
with a clean slate. It is an absolute forgiveness or waiver by the government on its
right to collect and is retrospective in application.

Tax Condonation
Tax condonation is forgiveness of the obligation of a certain taxpayer under certain
justifiable grounds. This is also referred to as tax remission.

Tax amnesty vs Tax Condonation

Amnesty covers both civil and criminal liabilities, but condonation covers only civil liabilities of
the tax payer.

Amnesty operates retrospectively by forgiving past violations. Condonation applies prospectively

to any unpaid balance of the tax; hence, the portion already paid by the taxpayer will not be
refunded.

Amnesty is also conditional upon the taxpayer paying the government a portion of the tax
whereas condonation requires no payment.

To learn more about this topic, read Banggawan (2017) on pages 17-20

LEARNING ACTIVITY 3

Reflection on Learning:
● Apply a scenario of a double taxation. May learn on Banggawan (2017) pp 17-18
● Tabulate the difference between tax amnesty and condonation,

LEARNING ACTIVITY:

1. Provide the following: Write your answers in your notebook, take a picture and submit in MS Teams in your
respective file folder:
● Definition of taxation
● Theories of cost allocation
● The Lifeblood Doctrine.
● The inherent powers of the State
● The scope of taxation.
● Limitations of the taxation power
● Stages of taxation
● Situs of taxation
● Other fundamental doctrines
● Double taxation
● Escape from taxation
● Differentiate Tax amnesty and tax condonation
● Deadline of submission Feb 17, 2021

PANGASINAN STATE UNIVERSITY 5

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in BAC 103 TAXATION: Income Taxation Module No._1_

SUMMARY

● Taxes are the lifeblood of the government, and their prompt and certain availability are
an imperious need. Upon taxation depends the government’s ability to serve the people
for whose benefit taxes are collected. (Vera vs. Fernandez)
● We need to learn the theories and principles of taxation and its application to appreciate
and understand bettter why the need for good citizenry to pay the correct Knowledge of
the don’ts of double taxation, remedies of taxpayer such as tax amnesty and
condonation is a good help and hope to our taxpayers.

REFERENCES

1.Rex Banggawan , Income Taxation, Real Excellence Publishing 2017 pp 1-34.

PANGASINAN STATE UNIVERSITY 6