INTRODUCTION OF BUSINESS TAXATION

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OUTLINE:• Introduction– Brief History– Definition– Principles– Objectives

• Body– Direct Tax– Indirect Tax– Sources of Tax Revenue Law

• Conclusion

BRIEF HISTORYSince the era of Egyptian Pharaohs

Tax imposed on cooking oil

Greece’s Athenian WarEisphora and Metoikion

During Roman EmpirePortoriaCaesar Augustus instituted an inheritance tax Julius Caesar ‘s reign, a 1 percent sales tax was imposed

Great Britain during occupation of RomansIncome Tax and Tax on Land and PropertyPrime minister, William Pitt the Younger announced

income tax to fund the Napoleonic wars in 1798

Colonial AmericaThrough its Molasses Act (1764) and Stamp Act (1765)A direct tax was placed on citizens after drafting the

Constitution in 1787

DEFINITION

“A contribution levied on persons, property or business for the support of government”

Oxford Dictionary

“A compulsory exaction of money by a public authority for public purposes enforceable by law”

“The process of “raising money for the purposes of government by means of contributions from individual persons”

High Court of Australia define tax as a payment that fulfilled the following characteristics:

Money raised for government purposes Payment not penalties Compulsory payment

Not payment for service rendered Not arbitrary

Not be incontestable

Taxation in UKPart of the government revenue from charges

against its citizen’s person or property or activityCitizens and corporate entities with UK source of

income, regardless the citizenship or the individual’s place of residence or the company’s place of registration

Payments to government that is the central government (Her Majesty’s Revenue and Customs) and the local government respectively

PRINCIPLES It is important for the federal policy makers and tax

designers to look into important criteria of taxation (cooperativeindividualism.org).

The principles (by Adam Smith) which are equity, certainty, convenience, efficiency are funded on a philosophy which does not accept the theory of the "social contract" as the basis for society.

1. Equity

o The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

2. Certainty

o The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.

3. Convenience

o Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.

4. Efficiency

o Every tax ought to be contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.

OBJECTIVES• Tax is the main source of revenue to finance governance

expenditure. For example, it is used to accommodate funds for medical services for the people.

• Tax policy will ensure that taxes are collected effectively and at minimum cost to both the government and taxpayers. This means that people should disclose the details of their properties for the inclusion of tax payment.

• It is also used to regulate the private sector of the economy to maintain the desired level of employment and increase economic development or growth. For example, it can be used to repair loopholes on the road.

OBJECTIVES (CONT’)

• Regulate the activities of specific areas of the private sector so as to encourage activities which are beneficial to the country and to discourage those which are not desirable in the national interest(s).

• Regulate the distribution of income and wealth between different types and classes of citizens (i.e. between self-employed and working people, people with different incomes pay different amount of tax rates).

• Regulate specific activities of citizens which are thought to be undesirable, e.g. drinking, smoking, gambling, etc.

• Ensure fairness and equity, i.e. the burden of tax is spread fairly and equitably among taxpayers.

OBJECTIVES (CONT’)

In terms of environment, tax is used to accommodate the maintenance of energy, water and waste management systems.

Also, tax can be imposed to protect environmental issues. For example, tax authorities may charge companies who do activities that damage the environment (factories that involve in deforestation)

DIRECT TAX It is a tax which is imposed directly to the taxpayer.

In which, government charge on income, property or wealth of people or firms (businessdictionary, 2010).

Based on the ‘ability to pay’ principle (businessdictionary, 2010). All who have income of any sort or who own property must pay direct taxes.

Types of Direct TaxesIn UK, there are 6 types of direct tax:

1. Income tax2. National Insurance Contributions tax3. Corporation tax

main taxes in UK4. Petroleum tax5. Inheritance tax6. Capital Gains tax

1. Income Tax

Based on individual’s income after some allowances are made.

Will be imposed if the income of any individual, whether employee or businessman, reaches a certain limit.

In UK, it is imposed based on 6 schedules that have been formed according to the Income Tax law. These

schedules are:

Schedule A: Based on employee's income Schedule B: Based on the incomes from land Schedule C: Based on the income from public securities Schedule D: Based on the commercial absorption of land Schedule E: Based on the business income Schedule F: Based on the dividend income

2. National Insurance Contribution (NIC) tax

It is a direct proportional tax taken off the earnings of those people in employment.

NICs are sums of money that people pay to the National Insurance from their earnings.

Amount required to pay: ~depends on how they earn their money (i.e. employed or self-employed) and how much they earn.

To ensure that they are entitled to receive certain state benefits if they need them, and the State Pension when they retire.

3. Corporation Tax A tax on the profits of limited companies and some

organisations.

It is a proportional tax charged at 30% for larger companies and 20% for 'smaller' firms.

For example, a company making £10,000 profit:

£6,000 – dividend £10,000

£4,000 – to another company

So,19% corporation tax will be taken from the £6,000.

4. Petroleum Revenue Tax

This tax is charged on the income from exploiting North Sea oil and gas. Paid in

addition to corporation tax.

5. Inheritance tax

It is charged on the value of wealth transferred from one person to another either at death or during a lifetime.

It is payable by different people in different circumstances.- typically, the trustees are responsible for paying Inheritance Tax on assets in, or transferred into, a trust.

6. Capital Gains tax It is a tax on the increase in value of certain assets when they are

sold compared with their value when they were bought.

In other words, it is a tax on capital ‘gains’.

People may have to pay Capital Gains tax if, for example, they:- sell, give away, exchange or otherwise dispose of (cease to own) an asset or part of an asset- receive money from an asset - for example compensation for a damaged asset.

For instance, if, when you sell or give away an asset it has increased in value, you may be taxable on the 'gain' (profit).

INDIRECT TAXTax on manufactured goods, imports etc and paid

Indirectly by the consumer (included in the price). (yourdictionary.com, 2010)

In some cases, the burden of the tax depends on the elasticity of demand.

From UK perspective:Taxes that are paid by consumer to supplier and hence to the Government.

Types of Indirect Tax

1. Value Added Tax

Tax on most businesses transaction in UK.

VAT is added to the price of goods and services.

Charged to:1.Business customer2.Non business customer

VAT (CONT’)VAT (CONT’)

According to the Emergency Budget, the rate will be increased to 20% effective from January 4th 2011.

To tackle the budget deficit they encounter.

2. Excise Duties

Goods from abroad for personal use, sending or ordering them from abroad.

Includes :

3. Air Passenger Duty

A type of excise duty which is charged on the carriage, from a UK airport of

chargeable passengers on chargeable aircrafts.

SOURCES OF TAX REVENUE LAW

Tax EvasionTax evasion consists of seeking to mislead HMRC by either: Suppressing information to which they are entitled Providing them with deliberately false information

How is it being dealt???(i) Minor Cases Penalties Magistrates courts as refer to “statutory

offence of evading income tax.”

(ii) Serious Cases Fines and/or imprisonment on conviction

Tax Avoidance In broad sense, it includes any legal method of reducing tax burden i.e. taking

advantage of tax shelter opportunities explicitly offered by tax legislations.

In narrow sense, it is designed to produce unintended tax advantage for the taxpayer.

In this matter, the court could disregard transactions which were destined and designed to avoid tax

i.e. Finance Act 2004 introduced- disclosure obligations on promoters of tax avoidance scheme and taxpayer to HMRC providing details as to enable HMRC to introduce counter avoidance measures at the earliest opportunity.

Conclusion Tax had existed since the early years. It developed over the years thus later spread throughout the

world. Tax simply explains that the government can increase their

revenue in order to pay for the goods and services and others which later will benefit the citizens.

This characterized how important the tax is to the country. With that, principles of taxation is used in which it acts as the

basis structure of tax system. Objectives are created to determine the success or the failure

of the system.

By referring to the UK taxation system, the two types of tax are introduced; direct and indirect taxes.

Direct tax is a tax which is imposed directly to the taxpayer. Indirect tax is a tax on manufactured goods, imports etc and

paid Indirectly by the consumer (included in the price). Different sources of tax revenue law had helped to solve any

disputes between taxpayer and tax authority. In order to minimized the tax liabilities, tax avoidance is

legally help to reduce the tax burden. While tax evasion is illegal due to its unethical behavior.

Importance of taxation is realized through the rationale of taxation.

References• All Sands.com, (2010). History of Taxation. Retrieved on 27th August 2010, from

http://www.allsands.com/history/events/historyoftaxat_xzq_gn.htm• Business Dictionary, (2010). Retrieved on 26th August 2010, from

http://www.businessdictionary.com• Capital Gains Tax. Retrieved on 27th August 2010, from http://www.direct.gov.uk• Direct taxation in the UK. Retrieved on 27th August 2010, from http://tutor2u.net• Direct Taxes. Retrieved on 27th August 2010, from http://www.economywatch.com• HM Revenue and Customs (2010). Retrieved on 26th August 2010, from

http://www.hmrc.gov.uk• National Insurance Contributions. Retrieved on 27th August 2010, from

http://www.monetos.co.uk• Paine. A., (2010), Sales Tax Hike In U.K. Emergency Budget. Retrieved on 26th August 2010,

from http://www.billboard.biz/bbbiz/content_display/industry/e3i82a006de3290b1a6186cfabffb41bba9

• TaxWorld (1999). History of Taxation. Retrieved on 2nd August 2010, http://www.taxworld.org/History/history.pdf

• http://www.ehow.co.uk• http://www.hmrc.gov.uk

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