PRINCIPLES OF TAXATION

Definition of Terms

TAXATION is defined in many ways.

Commonly heard definitions include:

o   It is the process by which the sovereign or government, through its law making body, raises revenues to  use and defray expenses of government.

o   It is a means of government in increasing its revenue under the authority of the law, purposely used to promote welfare and protection of its citizenry.

o   It is the collection of the share of individual and organizational income by a government under the authority of the law.

Concept of Taxation

o   Taxation is the inherent power of the state to impose and demand contribution upon persons, properties, or rights for the purpose of generating revenues for public purposes.

o   The power of taxation is upon necessity and is inherent in every government or sovereign.

Principles and Theories of Taxation

o   The Benefit Principle.

This principle holds the individuals should be taxed in proportion to the benefits they receive from the governments and that taxes should be paid by those people who receive the direct benefit of the government programs and projects out of the taxes paid.

o   The Ability-to-Pay Principle.

This principle holds that taxes should relate with the people’s income or the ability to pay, that is, people with greater income or wealth and can afford to pay more taxes should be taxed at a higher rate than people with less wealth. Ex. Individual income tax.

o   The Equal-Distribution Principle.

This principle that income, wealth, and transaction should be taxed at a fixed percentage; that is, people who earn more and buy more should pay more taxes, but will not pay a higher rate of taxes.

Structures of a Tax System

o   A tax is proportional.

Meaning the government takes an amount of money from a person which is indirect proportion to his income. Ex. Ben salary is 10,000 and the government is deducting 10% of his salary for tax. After a year his income increases to 15,000 and the governments now deducts 12% of his salary for tax. The said tax is proportional.

o   A tax is regressive.

Meaning that the governments takes a larger percentage of a persons income per tax, while he is receiving a lower income. Ex. Ben’s salary 10,000 and government is asking him to pay 15% of his salary for tax which is contrary to our given example in number 1.

o   A tax is progressive.

Meaning that the government takes a lager percentage of his salary for tax due to his high salary. Ex. Ben has a monthly income of 30,000 and the governments deducted 20% of his salary for tax. The tax amount is proportionately equal to someone’s status in the society. A rich man should pay more than a poor man.

Significance of Taxation

o   Primary purpose:

Generates funds or revenues use to defray expenses incurred by the government in promoting the general welfare of its citizenry.

o   Other purposes:

o      to equitably contribute to the wealth of the nation

o      to protect new industries

o      to protect local producers

Characteristics of Tax

o   It is enforced contribution.

Its payment is not voluntary nature, and the imposition is not dependent upon the will of the person taxed.

o   It is generally payable in liquid cash.

This means that payment by cheques, promissory notes, or in kind is not accepted.

o   It is proportionate in character.

Payment of taxes should be based on the ability to pay principle; the higher income of the tax payer the bigger amount of the tax paid.

o   It is levied (to impose; collect) on person, property or transaction.

There are taxes that are imposed or levied on acts, rights or privileges. Ex. Documentary tax.

o   It is levied by the state which has jurisdiction over the person or property.

As a general rule, only persons, properties, acts, right or transaction within the jurisdiction of the taxing state are subject for taxation.

o   It is levied by the law making body of the state.

This means that a prior law must be enacted first by the parliament before assessment and collection may be implemented. 

o   It is levied for public purposes.

Taxes or imposed to support the government for implementation of projects and programs.

Basic Principles of a Sound Tax System

o   Fiscal adequacy.

Means that the sources of revenue taken as a whole should be sufficient to meet the expanding expenditures of the government regardless of business, export taxes, trade balances, and problems of economic adjustment. Revenues should be capable expanding or contracting annually in response to variations of public expenditures.

o   Equality or Theoretical Justice.

Means the taxes levied must be base upon the ability of the citizen to pay.

o   Administrative Feasibility.

This principle connotes that in a successful tax system, such tax should be clear and plain to taxpayers, capable of enforcement by an adequate and well-trained staff of public office, convenient as to the time and manner payment, and not unduly burdensome upon or discouraging to business activity.

o   Consistency or Compatibility with Economic Goals.

This refer to the tax laws that should be consistent with economic goals or programs of the government. This are the basic services intended for the masses.

Classification of Taxes

o   As to subject matter

o      Personal, Poll or Capitation Tax (ex. Residence Tax)

o      Property Tax. (ex. Real Estate Tax)

o      Excise Tax (ex. RVAT)

o   As to who bears the burden

o      Direct Tax (ex. Income Tax)

o      Indirect Tax (ex. Buying of goods and services (RVAT) )

o   As to determination of account

o      Specific Tax (ex. Taxes on wines)

o      Ad Valorem Tax (ex. Tax according to value such as Real Estate Tax.

o   As to purpose

o      General Tax (ex. Almost All Taxes)

o      Special Tax

o   As to scope

o      National Tax (ex. National Revenue Taxes)

o      Local Tax

Distinction of Tax

o   Tax distinguished from Toll

o      A tax is demand of sovereignty, while toll is demand for proprietorship.

o      A tax is paid for the use of the government’s property, while a toll is paid for the use of another’s property.

o      A tax may be imposed by the government only, while a toll is enforced by the government or a private individual or entity.

o   Tax distinguished from Penalty

o      A tax is intended to raise revenue, while penalty is designed to regulate conduct.

o      A tax may be imposed by the government only while a penalty may be imposed by the government or a private individual.

o   Tax distinguished from Debt

o      A tax is base on law, while a debt is based on contract.

o      A tax may not be assignable, while a debt is assignable.

o      A tax is generally payable in cash, while debt is payable in cash or in kind.

o      A person may be imprisoned for a non-payment of taxes, but any person may not be imprisoned for non-payment of debt.

o   Tax distinguished from other Terms

o      Revenue.

This refers funds or income derived by the government whether from tax or any other source in another sense.

o      Internal Revenue.

It refers to taxes imposed by the legislature other than duties on imports and exports.

o      Customs Duties.

These are taxes imposed on goods exported into a country.

Entities Exempted from Taxation

o   Religious Institutions

o   Charitable Institutions

o   Non-Profit, Non-Stock Educational Institutions

o   Non-profit Cemeteries

o   Government Institutions

o   Foreign Diplomats

Situs of Taxation

Situs is a latin term which means “situation”, “location”, or “place.” In short, its literal meaning refers to a place taxation. In real property, the rules is tax is imposed to a place or state where the property is located and subject to be tax has a jurisdiction over the said property.

Double Taxation

o   Direct Duplicate

o   Elements:

o   Taxing twice

o   By the same taxing authority

o   Within the same taxing jurisdiction

o   For the same purpose

o   In the same taxable period

o   Involving the same purpose

o   Indirect duplicate

o   Indirect duplicate taxation, on the other hand, occurs when taxes on the property are not imposed by the same taxing authority. The local and national governments imposed taxes on the same property during one taxable period. This kind of imposition is legal.

Forms of Escape from Taxation

o   6 forms of escape from taxation

o   Shifting.

It is one way of passing the burden of tax from one person to another. Ex. Taxes paid by the manufacturer may be shifted to the consumer by adding the amount of the tax paid to price of the product.

o   Kinds of Shifting

o      Forward shifting occurs when the burden of the tax is transferred from a factor of the production to the factor of distribution.

o      Backward shifting occurs when the burden of tax is transferred from the consumer to the producer or manufacturer.

o      Onward shifting occurs when tax is shifted to two or more times either forward or backward.

o   Capitalization.

This refers to the reduction in the price of the tax object to the capitalized value of future taxes which the purchaser expects to be called upon to pay. Ex: A reduction made by the seller on the price of the real estate, in anticipation of the future tax to be shouldered by the future buyer.

o   Transformation 
    occurs when the manufacturer or producer upon whom the tax has been imposed pays the tax and endeavor to “recoup” ( make up for ) himself by improving his process of production

o   Tax Evasion 
    is the practice by the taxpayer through illegal or fraudulent means to defeat or lessen the amount for tax. This is also know as “tax dodging.”

o   Tax Avoidance 
    is the exploitation by the taxpayer of legally permissible methods in order to avoid or reduce tax liability. This is also known as “tax minimization.”

o   Tax Exemption 
   is the grant of immunity or freedom from a financial charge or obligation or burden to which others are subjected.

o   Grounds for tax exemption:

o   Contract, wherein the government is the contracting party.

o   Public policy

o   Reciprocity

Disclaimer

In this note, we have attempted to summarize some of the significant aspects to be kept in mind by readers to ensure compliance of Income tax laws and regulations. Readers should ensure to verify specific provisions as applicable to each case before taking any business decisions. It would be pertinent to note that some changes are being made to the Income tax laws and rules and regulations on a continuous basis by way of notifications, clarifications etc issued by the department based on their practical experience in implementing the legislation.

It may be noted that nothing contained in this note should be regarded as our opinion.  Professional advice should be sought for applicability of legal provisions based on specific facts. Though reasonable efforts have been taken to avoid errors or omissions in this note we are not responsible for any liability arising to readers directly or indirectly due to any mis-statements or error contained in this note. It must be noted that the views expressed in the note are based on our understanding of the law and regulations as published by the Government authorities and we may or may not agree or subscribe to such views/ interpretations.