A tax is a compulsory financial contribution made by private individuals, groups, and institutions towards the expenditure of the government. Before going into the types of taxes in Nigeria, its good to know that taxation is affected by the individuals and institutions of a country to the government. It may also be imposed on goods to defray government expenses. Taxation should not be regarded as a direct payment for goods and services provided by the government. It is rather the contribution which the individual is required, compulsorily to make towards the expenses of the government.
TYPES OF TAXES IN NIGERIA
The System Of Taxation:
Taxes may be put into classes, depending on the relationship between the tax base which is the total amount of money from which a particular proportion must be transferred to the government AND the tax rate which means that proportion of the tax base must be paid in tax to the government.
These Classes Are:
Progressive Tax and
This is a system of taxation in which the tax rate payable is the same, regardless of the size of the tax base. Under this system, every individual is made to pay the same proportion of his income as tax. Proportional tax means that at all levels of income, a fixed percentage must be paid as tax.
The effect of taxing everybody at the same rate, as in the proportional tax system, therefore, is to reduce the welfare of low -income earners more than that of the high -income earners.
This is a system of taxation in which the tax rate increases more proportionately than the size of the tax rate. Under a system of progressive taxation, the tax claims an increasing proportion of the income as the later increases.
Thus, it can be seen that a progressive tax system is in keeping with the “ability pay” principle. The higher the income, the more the tax and the lower the income, the lesser the tax. This is the fairest system of taxation. It is based on the fact that the marginal utility of income diminishes as income increases.
Since the marginal utility of one naira is lesser at high-income levels, high -income earners will more easily part with more of it as tax than low-income earners. This results in a redistribution of income in favor of the poor.
Regressive Tax System:
This is a system of taxation in which the tax rate is a decreasing proportion of the tax base as income increases. That is to say, the higher the tax base, the lower the tax rate. This is an unfair system of taxation because the high-income earners are made to pay a lower proportion of their earnings as tax than low-income earners.
TYPES OF TAXES IN NIGERIA
Taxes are classified into two main kinds;
Direct Tax and
Indirect Tax, in which the two of them depend on the tax incidence and the method of collection.
Direct taxes are taxes levied on individuals and organizations, the burden of which cannot be easily passed on to others. Direct taxes are so-called because they involve a direct personal relationship between the taxpayer and the tax levying authority. The amount paid as direct taxes can easily be determined. Direct taxes are imposed in the following forms;
Capital Transfer tax and then
Capital gains tax.
This is a tax imposed on the income earned by individuals and such unincorporated businesses as a sole trader and partnership. It is calculated on the basis of pay-as-you-earn after deduction of non-taxable allowances such as dependents’ allowances for aged parents, spouse and four children under 18 years of age; utility allowance, entertainment allowance, meal subsidy, and rent subsidy.
This is the tax levied on the profits of all incorporated business establishments. It is worked out such that the higher the profit level, the higher the proportion of it to be paid out as a tax. Company tax is calculated after the deduction of accrued interest and all revenue allowances, but before the distribution of dividends.
This is a tax levied equally on each person resident in a country regardless of the level of income. In Nigeria, it is imposed on peasants where the tax base cannot be precisely determined due to the fact that they are neither employed in the public sector nor in the organized private sector. This is an example of a regressive system of taxation.
Capital Transfer Tax:
This is a tax paid on the value of all property or wealth received from another person, whether such person is dead or still alive.
Capital Gains Tax:
The capital gains tax is a tax imposed on the gains made from the sale of capital assets.
The Indirect Tax:
Indirect tax is taxes levied on expenditure. They are located initially on the producer, wholesaler or the importer, but are ultimately paid wholly by either the final consumer or the producer, or alternatively shared proportionately according to the degree of elasticity of demand for the taxed product. Thus, the consumer can only avoid an indirect tax by refraining from making a purchase.
They are called indirect taxes because the tax assessment was not in respect of the final payer. The amount paid as indirect taxes is not known to the consumer who ultimately pays it because there is no direct relationship between the consumer and the levying authority. Indirect taxes may be broadly divided into two classes.
Specific Tax and
Ad Valorem Tax.
A tax is specific if the amount of tax is a specific amount of money and it is an Ad Valorem tax if the amount of tax paid varies according to the value of the item purchased or sold.
Just as Direct Tax take a variety of forms, Indirect taxes are encounter in several forms
Some Of These Forms Are;
Import Duty tax
Export Duty Tax
Custom Duty Tax and then
This is a tax paid on goods from outside the country. Import duty is an example of an Ad Valorem tax.
This is the tax paid on account of the goods and services sent to foreign countries.
Import and Export duties together make up what is known as a customs duty.
Excise Duty is a tax paid on goods manufactured and used within the country.
Merits And Demerit Of Taxes In Nigeria
Direct and Indirect taxes have both advantages and disadvantages;
MERITS OF DIRECT TAXES:
Cheapness of Collection
Facilitation of planning and
DEMERITS OF DIRECT TAXES:
Discouragement of Zeal
Reduction of Capital Formation.
MERITS OF INDIRECT TAXES:
Protection of home industries
Less social discontent.
DEMERITS OF INDIRECT TAXES:
Inexactitude of revenue
Economic Effects Of Taxation In Nigeria
Taxation has a number of important economic effects. Some of those effects are as follows;
The possibility of a very high rate leading to avoidance of tax.
Disincentive to labor.
Disincentive to entrepreneur
Disincentive to saving and alteration of the production structure.
Objectives Of Taxation In Nigeria
The main explanations for the imposition of taxes are to;
It will be nice if each country should adopt the Progressive system of tax system because it follows a proportional increase in the rate of tax when an income increases which made it be the fairest system of taxation.