LibraryWorks No. 07 - Introduction to Taxation

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LibraryWorks No. 07 - Introduction to Taxation

Post  Dune on Sat Feb 23, 2008 8:58 pm

Library Works No.07
Introduction to Taxation

1. What is Tax?

Tax is the enforced proportional contributions from the persons and property levied by the law-making body of the state by virtue of its sovereignty for support of the government and all public needs. It is an enforced contribution, generally payable in money, it is proportionate in character, it is levied on persons or property, it is also levied by the state which has jurisdiction over the person or property, it is levied by the law-making body of the state and is levied for public purposes.

2. What is Taxation?

Taxation is the act of laying tax, i.e. the process or means by which the sovereign, through its law-making body to defray the necessary expenses of government. Expressed in another way, it is a method of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must, therefore, bear its burdens.

3. What are the purposes and effects of taxation?

The purpose of taxation on the part of the government is to provide funds with which to promote the general welfare and protection of the citizen, and to enable it to finance its multifarious activities.

Almost all revenues of the government are derived from the taxes raised through taxation. Clearly, no government can perform its functions nor continue to exist without funds. Revenue from taxation, as the saying goes, is the lifeblood of a nation. It is therefore, important that people pay taxes promptly and willingly. Evasion or non-payment of taxes lessens the opportunity of the people to receive and enjoy essential government services.

Taxation has four main purposes or effects: Revenue, Redistribution, Repricing, and Representation.

The main purpose is revenue: taxes raise money to spend on roads, schools and hospitals, and on more indirect government functions like good regulation or justice systems. This is the most widely known function.

A second is redistribution. Normally, this means transferring wealth from the richer sections of society to poorer sections, and this function is widely accepted in most democracies, although the extent to which this should happen is always controversial.

A third purpose of taxation is repricing. Taxes are levied to address externalities: tobacco is taxed, for example, to discourage smoking, and many people advocate policies such as implementing a carbon tax.

A fourth, consequential effect of taxation in its historical setting has been representation.

The American revolutionary slogan "no taxation without representation" implied this: rulerís tax citizens and citizens demand accountability from their rulers as the other part of this bargain. Several studies have shown that direct taxation (such as income taxes) generates the greatest degree of accountability and better governance, while indirect taxation tends to have smaller effects.

4. Differentiate Tax Rate from Tax Base.

Tax Rate is the amount of charges imposed by the government upon personal or corporate income, capital gains, gifts, estates, and sales that are within its statutory authority to regulate. On the other hand, tax base total the amount of taxable property, assets, and income that can be taxed within a specific jurisdiction. A town's tax base is the assessed value of the homes and apartments (minus exempted property), income from businesses, and other sources of taxable activity. If a business moves out of the town, the tax base shrinks, shifting the tax burden onto remaining homeowners and businesses.

5. Differentiate proportional, progressive, regressive taxation.

Proportional taxation is based on a fixed percentage of the amount of the property, income or other basis to be taxed. Examples of this are the real property tax and the all percentage taxes.

Progressive or graduated taxation is the rating of tax of which it increases as the tax base or bracket increases. Examples of this are the income tax, estate tax and the donorís tax.

Regressive taxation is the rating of tax of which it decreases as the tax base or bracket increases. However, the Philippine government does not impose this kind of taxation.

6. Differentiate direct tax from indirect tax.

Direct tax is demanded from the person who also shoulders the burden of the tax; or tax which the taxpayer cannot shift to another. Examples of this are the community tax, corporate and individual income taxes. On the other hand, indirect tax is demanded from one person in the expectation and intention that he should indemnify before they reach customer who ultimately pays for them not as tax but as part of the purchase price to which it is added. Examples are all business taxes, such as value-added tax, percentage taxes and others; customs duties.

7. What are the different types of taxation? Discuss each

Capital Gains Tax is a tax imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets located in the Philippines, including pacto de retro sales and other forms of conditional sale.

Documentary Stamp Tax is a tax on documents, instruments, loan agreements and papers evidencing the acceptance, assignment, sale or transfer of an obligation, rights, or property incident thereto.

Donor's Tax is a tax on a donation or gift, and is imposed on the gratuitous transfer of property between two or more persons who are living at the time of the transfer.

Estate Tax is a tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death and on certain transfers which are made by law as equivalent to testamentary disposition.

Income Tax is a tax on all yearly profits arising from property, profession, trades or offices or as a tax on a personís income, emoluments, profits and the like.

Percentage Tax is a business tax imposed on persons or entities who sell or lease goods, properties or services in the course of trade or business whose gross annual sales or receipts do not exceed P550, 000 and are not VAT-registered.

Value Added Tax is a business tax imposed and collected from the seller in the course of trade or business on every sale of properties (real or personal) lease of goods or properties (real or personal) or vendors of services. It is an indirect tax, thus, it can be passed on to the buyer.

Withholding Tax on Compensation is the tax withheld from individuals receiving purely compensation income.

Expanded Withholding Tax is a kind of withholding tax which is prescribed only for certain payors and is creditable against the income tax due of the payee for the taxable quarter year.

Final Withholding Tax is a kind of withholding tax which is prescribed only for certain payors and is not creditable against the income tax due of the payee for the taxable year. Income Tax withheld constitutes the full and final payment of the Income Tax due from the payee on the said income.

Withholding Tax on Government Money Payments is the withholding tax withheld by government offices and instrumentalities, including government-owned or -controlled corporations and local government units, before making any payments to private individuals, corporations, partnerships and/or associations.


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