Types_of_Taxation

Taxation is the method used by governments to finance their expenditure and imposed on citizens and corporate entities. The systems of taxation vary among countries; that is based on the type of governance in the respective countries. The purpose and the categories of taxation however remains the same in all systems of governance. Taxation is divided into two broad categories: direct taxation which incorporates individual taxation and corporate taxation and indirect taxation. Individual taxation is one type of direct taxation which is imposed on the income accruing to employed persons. According to British External environment Government policy, Theory 1 of 25 October 2009; “this is one of the most important sources of government’s revenue in the taxation system , as it secures revenue in excess of twenty five percent of the total government tax revenue.” It is a tax that cannot be paid or passed on to any other person but paid by the employed person. This type of taxation is based on the principle of ability to pay. Income tax and health surcharge are two examples of taxes paid by individuals. Income tax is imposed on all incomes and the rate of tax increases as income increases. This is based on a pay as you earn (PAYE) system, whereby the more a person earns the more taxes is paid. Income tax rates are regularly adjusted by governments in annual budgets in relation to fluctuations in inflation. On the other hand, Health Surcharge is a tax that is levied in a two rates system based on the varying incomes of the employed persons. Another type of direct taxation is corporate taxation which is levied on the profits and short term gains of companies. Corporation taxes are compulsory fees paid directly to the government. Business levy is an example of corporation tax which is “a tax on the gross sales or receipts of companies and self employed persons.” The system of determining the taxable profit of the companies varies among countries and it is a different from the system assessing the financial profit of the company. Corporation taxation in addition to individual taxation constitutes in excess of twenty five percent of the total revenue secured by the government. The other broad category of taxation is indirect taxation which is imposed on the sale of goods and services. Indirect taxation is both used as a form of government revenue and as a method government uses to control consumption of a product. The most common types of indirect taxation are value added tax (VAT) and tariffs. VAT is known as a tax on goods and service, which requires consumers to pay a tax on goods and services they purchase and is the largest form of indirect tax. The amount of VAT that consumers pay is a fixed percentage of the value of the goods and services which is determined by the government in their fiscal policy. For example, currently in Trinidad and Tobago, it is set at 15 percent of the value of the goods and services. Another major type of indirect taxation is tariffs. A tariff is the tax placed on imported products. Due to trade linearization most governments no longer consider tariffs a major form of revenue. Tariffs are more commonly use to deter importation of a particular good in an effort to protect its local industries from the competition of large international firms which has cheaper prices; it will increase the tariff forcing consumers to purchase the local product as it will now be cheaper. Tariffs are considered indirect as it is not directly taken out of a person income; however, it is collected from someone who does not bear the entire cost of the tax. In every country taxation is the means used by governments to secure the revenue needed to finance their respective fiscal expenditures. The system of taxation is dependant on the type of governance and is clearly based on two types of taxation which are direct taxation, which includes individual taxes and corporate taxes, and indirect taxation. Income tax and health surcharge are taxes that are levied on the income earned by employed persons, whilst business levy is a corporate tax that is levied on businesses. On the other hand value added tax and tariff are taxes that are imposed indirectly, as it is not paid directly from a person’s income but is paid when as a percentage of the varied goods and services purchased. Reference Case, E Karl. Fair, Ray C. Principles of Economics 6th Edition. New Jersey: Prentice Hall, 2003. Print. Reference:                              British. External environment – Government policy- Theory 1. 25 October 2009. Web Business Directory. 2009. 25 October 2009. Hamel-Smith. Investor’s Guide to Trinidad and Tobago. 2005. 25 October 2009.