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COMMERCE COMMERCE A LEVEL(FORM SIX) FORM SIX (A LEVEL)

COMMERCE A LEVEL(FORM SIX) NOTES –

TAXATION
ecadmin . Update: January 31, 2023 3:08 pm

TAXATION
– This is a legal transfer of money from the public to government mainly as government revenue.
– A TAX is a compulsory contribution made by the taxpayers to the state towards its expenditure.
PURPOSE OF TAXATION
I. To raise government revenue. The main purpose of taxation is to raise revenue. The main source of government
revenue is taxation. Tax help to cover a daily revenue expenditure e.g. education, defense, health.
II. Reduce income inequalities. Through PAYE (Pay as you earn), where the high income earners reduce the gap
between rich and poor.
III. To increase economic activities. Money collected from taxation can be utilized for economic and social
development e.g. schools,hospitals etc.
IV. To discourage consumption of harmful commodities. Imposing high tax on Commodities such as beers,
cigarettes so as to discourage their consumption.
V. To adjust balance of payment deficit. balance of payment is widened by high importation and less exportation.
VI.To adjust inflation caused by high demand due to the more money in the circulation taxation help to reduce
money in circulation.
VII.To restrict importation for the purpose of protecting local industries By imposing heavy custom duties,
discourage importer for products whic
h are locally produced.
CANONS /PRINCIPLES OF TAXATION
i. EQUITY. The burden of taxation ought to be distributed owing tax payers according to their ability to pay. Taxes
must be proportional to the income of the tax payers it must conform
with his ability to pay its desirable to use income tax to ensure on equitable payment of TAX for rich and poor rich
to pay more and poor to pay his taxes
ii. CONVENIENCE. Tax should be easy to collect and not easy to evade, the time and manner of collection must be
convenient to both the state and the tax payers
iii.CERTAINTY. Taxes should not cause any hardship to the taxpayer. A taxpayer should know exactly what he has
to pay, the manner of payment and time of payment and there must be no
confusion in this regard.
iv. ECONOMY. The cost of collection should be low and the state should receive the full amount of the tax paid.
The amount collected should afford to meet the cost of administration
and collection.
v. PRODUCTIVITY OR HIGH YIELD. A tax should yield the revenue necessary to meet the changing need of the
economy, every tax imposed should give greater income to the
government.
vi. SIMPLICITY. The tax system must be simple to understand by both tax payers and tax collectors since the high
tax increases tax evasion.
vii. DIVERSITY. There must be different type of taxes so that the burden of these is an different group of society.
viii. ELASTICITY. It should be possible to adjust the rate of a tax to meet changed financial circumstances. It must
be possible to increase or decrease the taxes according to the
economic situation of the country e.g. during inflation taxes must be increased and vice versa.
CLASSIFICATION OF TAXES
Taxes can be classified according to the following groups.
I. According to tax base A tax base is what are you taxing. The tax base is the taxable income. under this we have a.
a) Income tax e.g. PAYE, corporation tax, development levy
b) Capital tax e.g. property tax capital gain tax, capital transfer tax
c) Consumption tax e.g. excise duties, VAT, sales Tax.
ii. According to the shift of incidence
– Direct tax
– Indirect tax
iii. Whether the tax is specific unit or advalorem
a) Unit or specific taxes are levied on the volume of what is to be taxed e.g. excise duties
b) Advalorem tax is levied on the value of the tax base e.g. income tax, VAT
a) Regressive taxes. These increasing as income of people increase
b) Proportional taxes. These are constant taxes rate among all tax payers Regressive taxes. These reduces as tax
payers income increases.
DIRECT TAXES:Are taxes imposed on incomes of individuals or properties of individuals.eg payee
ADVANTAGES OF DIRECT TAXES

1. EQUALITY. Direct taxes are usually assessed in accordance with a graded scale so that the rate of taxation
arises in relation to income. it is progressive.

2. ECONOMICAL. Cost of collection of direct taxes are comparatively low especially where the employer acts
act as tax collector , this save expenses of

3. collection

4. REDISTRIBUTION OF WEALTH. The direct tax plays significant role in redistribution of incomes.
 5. REVENUE. The yield from personal taxation is fairly certain and can be calculated reasonably accelerate in
advance.

6. ELASTIC. If the government suddenly stands in need of more revenue in an emergency, direct taxes can well
serve the purpose.

7. KNOWLEDGE TO TAX PAYER. The tax payer generally know exactly how he has to pay.

8. ? STIMULATE SPENDING OF MONEY. The interest of the

tax payer in the spending of public money is stimulate.

DISADVANTAGES OF DIRECT TAXES

i. EVASION IS POSSIBLE. The assessors can submit a false return of income and thus evade the tax that is why a
direct tax is a tax honesty. Evasion is encouraged more when rates of direct tax rate high
ii. DETERRENT TO WORK. A high rate of personal taxation may cause people to workless. A progressive rate of
tax means that over a certain income people may prefer to have leisure rather than extra earnings because a high
proportion later is taken by the government high rates of personal taxation will discourage the progression of extra
goods and services
iii. . DETERRENT TO SAVING. A high rate of personal taxation may reduce consumers ability to save since it
leaves them with less money to spend indeed the effect might lead to a reduction in saving by who are determined to
maintain their present level of expenditure
iv. DETERRENT TO ENTERPRISE. Corporation tax is a tax on the profits of companies and such a tax may stifle
enterprise effort and enterprise may be revitalized and discouraged where rates of direct taxation are highly
progressive.
v. IT IS NOT FLEXIBLE. It is not easy to revise a system that is fair for all classes.
INDIRECT TAXES
These are taxes imposed on goods and services.eg VAT,
ADVANTAGES OF INDIRECT TAXES
Indirect taxes are imposed on goods and services so that impact and incidence are on direct persons
i.VOLUNTARY PAYMENT. Payment of indirect taxes in voluntary in the sense that consumer can choose to avoid
expenditure on taxed goods and services e.g. if an
individual does not pay any tax on these items.
ii. MEANS OF REACHING THE POOR. It is same principle that every individual should pay something however
little to the state the poor are always exempted from
paying direct taxes they can be reached only through indirect taxes.
iii. ADMINISTRATION. Indirect taxes offer certain administrative merits, custom and excise duties are paid by
importers and manufacturers wholesalers is tax is
collected from wholesalers and retailers. Hence indirect taxes are more different the evade and easier to collect than
direct
iv.SELECTIVITY. Indirect taxes may be used to select to achieve particular aim e.g. they can be used as an
instrument of checking the consumption of harmful
commodities such as tobacco and alcohol and other intoxicated are highly taxed.
v.IT IS CONVENIENT. The method of payment is convenient, the tax payer does not feel the burden so direct
commodity taxes enable foreign visitors who would
otherwise be exempt from taxation to be reached.
DISADVANTAGES OF INDIRECT TAXES
??????????? ??REGRESSIVE. Indirect taxation is regressive in character they fall more heavily on people with low
income than those with high income. The proportion of tax
payers income paid in indirect tends to diminish as that income increase.
????????????? ???UNCERTAINTY YIELDING REVENUE. They are uncertain in yield unless necessaries are
taxed. In case of goods with elastic demand, the tax might not being in
much revenue the tax will raise the price and contact the demand when the product is not purchased the question of
the tax payment does not
raise it is not easy to determine the incidence.
????????? ????COST OF LIVING. An increase in indirect taxes can raise retail prices and hence the cost of living.
??????? ? ???UNECONOMICAL. Indirect taxes are not economical to the tax payer once he may pay more than the
amount actually received by the state
each middlemen taking margin may received a cancelled increase.
??????? ??HIGH COST OF COLLECTION. The real cost of collection of indirect tax may be high.
??????? ??? EASY TO SHIFT. The indirect tax may be shifted onto those who were not intended to bear it.
THE ECONOMIC EFFECT OF TAXATION
I. Disincentive to work.
II. Disincentive to saving.
III. Disincentive to investment.
IV. Disincentive of production. Producer will diverge from higher taxed industries to lower taxed industries taxation
of some commodities may divert economic resource from
high to low rated new industries particularly may be attached to places where the rates are low.
V. inflationary. Where tax is shifted on o the consumer higher prices may give rise to demands for higher wages
loading to higher costs leading to higher prices of other
commodities
FEATURES/CHARACTERISTICS OF TAXATION
? It is compulsory charge payable to the government.
? Only the government has power to levy taxes.
? Both citizens and non citizen are liable to pay tax of one kind or another.
? There is no consideration relation in taxation.
? Once the tax has been collected the government does not have obligation to account for the way the revenue has
been used.
? The payment of tax is made in monetary terms.
? The power of taxation is mainly to be used in collecting revenue is the state and not is the accomplishment of other
objectives.
THE TANZANIA REVENUE AUTHORITY
The Tanzania Revenue Authority Act No. 11 of 1995 established TRA. The Authority is a semi-autonomous agency
of the Government, responsible for the administration of the Central Government taxes as well as several non-tax
revenues. The Authority, which administers a number of taxes, is under the general supervision of Board of
Directors. The list of tax laws administered by TRA is shown in Tax Laws administered by TRA.
Functions of TRA
The major functions of the Authority are to:-
– Assess, collect and account for all Central Government Revenue.
– Administer efficiently and effectively all the revenue laws of the Central Government.
– Advise the Government on all matters relating to fiscal policy.
– Promote voluntary tax compliance.
– Improve the quality of services provided to taxpayers.
– Counteract fraud and other forms of tax and fiscal evasion.

– Produce trade statistics and publications.

ADVANTAGES OF VAT
i. VAT is a kind of tax which is well known by taxpayer and simple to collect.
ii. VAT is charged only when the consumer bays goods or use certain services.
iii. It is open because the taxpayer knows exactly the amount of tax to pay and when to pay it.
iv. VAT are charged from different products and business and thus distribute the tax burden to large number of tax
payers V. VAT encourage international trade i.e. export for charging goods and services to be exported at zero rating
revel.
v. VAT encourages people to save and invest their money into the economic sectors.
vi. VAT tend to reduce and sometimes solve the economic problems in the business.

TERMS IN TAXATION
????????????????????? ??Corporation taxes. These are taxes levied on the profit of the companies, corporation tax is
paid by incorporated business.
???????????????????? ???Taxes on capital as such is not taxed. Tax is paid when capital is sold or transferred. The
must important taxes are capital gain tax and capital transfer taxes
???????????????????? ????Capital gain tax (C.G.T). Capital gain tax may be paid when assets are sold at a profit e.g.
a saves who makes a capital gain of shs 8000 as a result of buying and selling shares
may have to pay capital gain tax on the profit
???????????????????? ???Capital transfer tax. Capital transfer tax may have to be paid when assets are transferred
from are one person to another e.g. son, capital transfer tax may have to be paid in this
is also called inheritance tax.
? ? ? ? ? ? ? ? ? ?? ?? TAX THRESHOLD. Is the income level at which a person becomes liable to income tax after
account has been taken of all allowance to which he his entitled.
vi.TAX RESERVES. Is an amount set aside for payment of tax when due since taxes on company profits are
collected in arrears.
?????????????????? ????The marginal rate of tax. Is the amount of tax a person would pay on each successive unit
of legal tax base. The effective rate of tax or average rat of tax the actual tax p
aid as
proportion of it we arrive at the effective rate of tax
Marginal rate of tax = increase in tax paid Or
Increase in income
marginal rate of tax = change in tax
Change in income

NB with progressive taxes. It is case that marginal rate is higher than the Average rate.
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