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WHAT IS TAX?

What is tax was the question posed to me by my kid brother after being beaten by his teacher for not being able to answer the question ‘what is tax’. The sober looks on his face made me to write this post to explain the meaning of taxation to the ordinary in an ordinary and simple language.

Tax as a word is a now used to represent the money that is collected by the government of a state in order to have enough fund to smoothly run the affairs of the state. Taxation is a compulsory levy imposed on the citizens of a country that are up to the age of paying tax. The laws that govern the; rates, procedures and qualifying items for taxation is called the ‘tax laws’ or Finance Act for those living in the UK.

We have both the direct and the indirect tax. Direct taxes are those taxes that are directly charged to taxable income of taxable persons while indirect tax are those taxes that are levied on middle men that will eventually be borne by the end user of a particular taxable product a good example is the Vat (value added tax). A value added tax is the compulsory levy imposed on the extra value added to a product by the manufacturer which will ultimately be borne by the consumer of the product.

Tax laws are complex and varied from country to country. The Nigerian tax laws, the UK tax laws and the American tax laws are not the same for instance. It takes the service of tax attorney / tax lawyer to be well guided in relevant tax matters. A tax specialist is called a tax consultant in most cases and can either a tax accountant or a tax lawyer.

The filing of tax has been made easier these days as one can easily go online and file for his or her tax returns. The only problem however is that tax laws can be complex and changes constantly. This makes it difficult for a person without good background in taxation to keep up with. Outside these difficulties, anyone can file for his or her tax returns.

Government use monetary or fiscal tools to control money supply in a country and taxation which is the process of fashioning out efficient ways of administering tax happens to be one of the fiscal tools that the government can use to control things like inflation and unemployment in a country.

MEANING OF TAX AND TAXATION- AN INTRODUCTION

Taxation is a compulsory levy that the government of a country or its appropriate agency imposes on taxable persons, individuals, businesses and other bodies to allow the government provide money needed for the running of government and to achieve other macro economic objectives and fiscal policies of the government.

The traditional purpose of imposing tax and taxation is to raise money to run the affairs of the government. However, recently, I have seen government and their agencies imposing taxes for some other purposes like; stimulating investment, reducing inflation, encourage the purchase of local goods, discouraging the consumption of certain goods.

The simple fact that taxation is a compulsory levy, it is not meant to be paid by all. It is only a levy that is meant for a class of people. These classes of people are called ‘taxable persons’. Personal income taxes for instance are levied on persons who earn income – up to certain amount and corporate taxes are imposed on those corporate entities that make profit from trade or business.

People are getting it all wrong by thinking that commensurate service should be sought from the government for the mere fact that she or he pays taxes. In as much as tax monies are meant to be used to carry out the functions of the government and this may include providing social welfare, protecting life and property, provision of good roads, quality health care, quality education, etc. It is solely the discretion of the government to decide what to use the money for. The government may decide to place priority on different thing entirely.

Citizens have no right to refuse paying tax for whatsoever reason. Failing to pay their taxes is regarded as tax aversion. And tax aversion is a criminal offence. The punishment for tax aversion varies from state to state and from country to country.

I always tell people to never take tax aversion as an option. Rather, tax planning should be employed to take advantage of the loopholes in the tax laws. Better still, you can decide not to earn money and be free from taxation than try to out smart the tax laws.

Auditors don’t hesitate to bounce on anybody who is suspected to have some source of income hidden from the tax authority. Tax audit is not a pleasant experience for anybody to have.

Countries that get revenue from oil also have aspects of the tax law that deals with petroleum tax. Nigeria for instance has a special statute governing taxation of oil companies in Nigeria. It is called PPT (petroleum profit tax).

In cases where you are in doubt of what the tax laws in your country is saying, consult with your tax lawyer and other tax consultants like accountants for clarification.