Advanced Taxation Introduction/Overview PDF

Advanced Taxation Introduction/Overview Introduction and Overview Welcome Housekeeping rules Evaluation Matrix Discussion questions - 3 X 5% = 15% Attendance - 5% Assignment - 20% MME - 20% EOSA - 40% Introduction and Overview Overview of Tax Administration Jamaic...

Advanced Taxation Introduction/Overview Introduction and Overview Welcome Housekeeping rules Evaluation Matrix Discussion questions - 3 X 5% = 15% Attendance - 5% Assignment - 20% MME - 20% EOSA - 40% Introduction and Overview Overview of Tax Administration Jamaica (TAJ) Taxation of Companies Taxation of Other Businesses Charities and Associations International Tax issues General Consumption Tax Course Evaluation Presentation Outline Define Define the term taxation Explai Explain the attributes of a good tax n system Outlin Outline the main tax structures e Discus Discuss the country’s right to tax s Explai Explain the economic effects of n taxation  1.1What is taxation? It is the inherent power by which the sovereign state imposes financial burden upon persons and property as a means of raising revenues in order to defray the necessary expenses of the government (Tax Digest, 2002). Taxation is the practice of collecting money from citizens based on their earnings and property. The money raised from taxation supports the government and allows it to fund police and courts, have a military, build and maintain roads, along with many other services. (Tax Law and Jurisprudence by Justice Vitug, 2000) 1.1 Coercive vs. Contractual Taxation? Coercive: Uncertainty in assessing tax liabilities. Intimidation and force in the collection process. Absence of any representation for taxpayers in policy decision. Taxes are not exchange for anything much. Contractual:  Open exchange of tax revenues for services.  Standardized methods of assessing and collecting revenue.  A voice for taxpayers in setting tax policy.  Semi-voluntary compliance of taxpayers. The distinguishing features of a tax are: It is Compulsory It is imposed on all citizen It is imposed by the exercise of the state’s sovereign power It is levied by the ordinary legislative process It is imposed for a public purpose. Attributes/Principles/ Canons of a ‘Good Tax System’: Attributes/Principles/Canons of a ‘Good Tax System’: 1. Canon of Equity The principle aims at providing economic and social justice to the people. According to this principle, every person should pay to the government depending upon his ability to pay. The rich class people should pay higher taxes to the government, because without the protection of the government authorities (Police, Defence, etc.) they could not have earned and enjoyed their income. Adam Smith argued that the taxes should be proportional to income, i.e., citizens should pay the taxes in proportion to the revenue which they respectively enjoy under the protection of the state. 2. Canon of Certainty According to Adam Smith, the tax which an individual must pay should be certain, not arbitrary. The tax payer should know in advance how much tax he must pay, at what time he must pay the tax, and in what form the tax is to be paid to the government. In other words, every tax should satisfy the canon of certainty. At the same time a good tax system also ensures that the government is also certain about the amount that will be collected by way of tax.  Attributes/Principles/Canons of a ‘Good Tax System’: 3. Canon of Convenience The mode and timing of tax payment should be as far as possible, convenient to the tax payers. For example, land revenue is collected at time of harvest income tax is deducted at source. Convenient tax system will encourage people to pay tax and will increase tax revenue. 4. Canon of Economy This principle states that there should be economy in tax administration. The cost of tax collection should be lower than the amount of tax collected. It may not serve any purpose, if the taxes imposed are widespread but are difficult to administer. Therefore, it would make no sense to impose certain taxes, if it is difficult to administer. 5. Canon of Productivity It is also known as the canon of fiscal adequacy. According to this principle, the tax system should be able to yield enough revenue for the treasury and the government should have no need to resort to deficit financing. This is a good principle to follow in a developing economy. Attributes/Principles/Canons of a ‘Good Tax System’: 6. Canon of Elasticity According to this canon, every tax imposed by the government should be elastic in nature. In other words, the income from tax should be capable of increasing or decreasing according to the requirement of the country. For example, if the government needs more income at time of crisis, the tax should be capable of yielding more income through increase in its rate. 7. Canon of Flexibility It should be easily possible for the authorities to revise the tax structure both with respect to its coverage and rates, to suit the changing requirements of the economy. With changing time and conditions, the tax system needs to be changed without much difficulty. The tax system must be flexible and not rigid. Attributes/Principles/Canons of a ‘Good Tax System’: 8. Canon of Simplicity The tax system should not be complicated. That makes it difficult to understand and administer and results in problems of interpretation and disputes. In India, the efforts of the government in recent years have been to make the system simple. 9. Canon of Diversity This principle states that the government should collect taxes from different sources rather than concentrating on a single source of tax. It is not advisable for the government to depend upon a single source of tax, it may result in inequity to the certain section of the society; uncertainty for the government to raise funds. If the tax revenue comes from diversified source, then any reduction in tax revenue because of any one cause is bound to be small. Tax Structure  Structure of Taxation Direct Taxes: A tax that is paid directly by an individual or organization to the imposing entity. A taxpayer pays a direct tax to a government for different purposes, including personal property tax, income tax or taxes on assets. Indirect Taxes: A tax that increases the price of a good so that consumers are actual paying the tax by paying more for the products. An indirect tax is most often thought of as a tax that is shifted from one taxpayer to another, by way of increase in the price of the good. An example is the General Consumption Tax (GCT)  Structure of Taxation Advantages of Direct Taxes: 1. Equitable. The burden of direct taxes cannot be shifted. Hence, equality of sacrifice can be attained through progression. The tax raises the price of the commodity and the price of a commodity is the same for every person, rich or poor. 2. Economical. Their cost of collection is low. They are mostly collected "at the source". For instance, the income tax is deducted from an officer's pay every month. This saves expense. The employer acts as an honorary tax collector. 3. Certain. In the case of a direct tax, the payers know how much is due from them and when. The authorities also know the amount of revenue they can expect. There is certainty on both sides. Certainty minimizes corruption on the part of the collecting officials.  Structure of Taxation Advantages of Direct Taxes: 4. Elastic. If the State suddenly stands in need of more funds in an emergency, direct taxes can well serve the purpose. The yield from income tax can be easily increased by raising their rate. 5. Productive. Another virtue of direct taxes is that they are very produc­tive. As a community grows in numbers and prosperity, the return from direct taxes expands automatically. The direct taxes yield large revenue to the State. 6. A Means of Developing Civic Sense. In the case of a direct tax, a person knows that he is paying a tax; he feels conscious of his rights. He claims the right to know how the Government uses his money and approves or criticizes it. Civic sense is thus developed. He behaves as a responsible citizen.  Structure of Taxation Disadvantages of Direct Taxes: 1.Inconvenient. The great disadvantage of a direct tax is that it pinches the payer. He 'squeaks' when a lump sum is taken out of his pocket. The direct taxes are thus very inconvenient to pay. Nobody can help feeling the pinch. 2. Evadable. The person being assessed can submit a false return of income and thus evade the tax. That is why a direct tax is "a tax on honesty". There is a lot of evasion. Many of those who should be paying taxes go scot-free by concealing their incomes. 3. Arbitrary. If taxes are progressive, the rate of progression has to be fixed arbitrarily; and if proportional, they fall more heavily on the poor. Thus, both are bad. The rate of taxes depends upon the whim of the Finance Minister. 4. If the taxes are too heavy, they discourage saving and investment. In that, case the country will suffer economically Tax classification based on income: Regressive Tax A tax that takes a larger percentage from low-income people than from high-income people. A regressive tax is generally a tax that is applied uniformly. This means that it hits lower-income individuals harder. Tax classification based on income: Regressive Tax Merits of Regressive Tax Regressive tax helps to reduce the demand for goods like tobacco and alcohol products. People get the freedom to choose the products they need and the tax can be paid only on the goods they need. Only the people who need the product shall pay for the goods. Demerits of Regressive Tax  Regressive Tax paid by the poor will be more and the income left for their living will be less as a major part of the earning will be paid as tax.  Unemployment level increases as the poor might not be willing to work as the major part of the earning should be paid as tax.  Revenue might decrease if the consumption of goods is reduced by low-income people.  Tax classification based on income: Progressive Tax A tax that takes a larger percentage from the income of high-income earners than it does from low-income individuals. Taxpayers are broken down into categories based on taxable income; the more one earns, the more taxes they will have to pay once they cross the benchmark cut-off points between the different tax bracket levels. Tax classification based on income: Progressive Tax Merits of Progressive Tax  As rich people pay more than the poor, so the progressive taxes are equitable.  It helps to reduce unequal distribution of income and wealth.  It yields more revenue, so it is productive.  It is economical because the cost of the collection tends to be lower.  It is elastic in nature. Demerits of Progressive Tax  There is the chance of tax evasion.  It discourages the saving and investment.  The rate of tax may be changed every year according to the news of the government, so it is unstable. Tax classification based on income: Proportional Tax A tax system that requires the same percentage of income from all taxpayers, regardless of their earnings. A proportional tax applies the same tax rate across low-, middle- and high-income taxpayers. Tax classification based on income: Proportional Tax Merits of Proportional Tax  It is simple and easy to understand as the rate of the tax is same.  It encourages the saving and investment due to uniform rate.  It is simple to calculate as the rate is same for every level of income. Demerits of Proportional Tax  It doesn’t follow the principle of equitability as the rate of tax is same for both poor and rich people.  It is inelastic nature.  As the burden of a tax is more in poor than rich so it brings social justice. Types of Taxes National Insurance Scheme:  Established in 1965 by the National Insurance Act.  Administered by the Ministry of Labour and Social Security  Contributors are employed persons, self-employed, voluntary contributors and employers.  Benefits:  Pension  Widow’s and widower’s benefit  Orphan’s benefit  Funeral grant  Rate : 3% up to a maximum of $5,000,000 / Employer 3%  Self- Employed 6% National Housing Trust Contribution:  Established in 1975 by the National Housing Trust Act.  Benefits to contributors are: 1. Housing benefits for qualified contributors 2. Refund of individual contributions after 7 years (i.e. in the 8th year) 3. Cash grant on death, retirement or permanent incapacity  The floor is the prevailing minimum wage, and there is no ceiling.  Rate : 2% for employees / for employers it is 3%  Self- Employed 3%  Education Tax:  Established in 1983 by the Education Tax Act.  Purpose is to advance educational goals.  Apart of the Consolidated Fund (lot of criticism)  Certain employers are exempted from the employer’s portion. E.g. The University of the West Indies.  Rate : 2.25% for employees / for employers it is 3.5%  Self- Employed 2.25%  HUMAN EMPLOYMENT & RESOURCE TRAINING (HEART):  Some of the objective of the HEART fund are to: 1. Develop, encourage, monitor and provide finance for training scheme for employment of trainees. 2. Provide employment opportunities for trainees. 3. Assist in the placement of persons seeking employment in Jamaica. 4. Promote employment projects.  HEART contributions are only paid by employers whose total gross taxable monthly emoluments exceed $14,444 monthly.  Rate : 0% for employees / for employers it is 3%  Self- Employed 0%  Income Tax (P.A.Y.E.):  Based on the Income Tax Act.  Tax-free threshold (0 %) - $1,500,096 per annum  Rate of 25% up to $6,000,000 and 30% over $6,000,000  Tax credit (allowances) - E.g. Pension  Corporation Tax  Companies Income Tax  With effect from 2013 the tax rates are: Regulated Companies 33 1/3% Unregulated companies 25% Large unregulated companies 30% Building Societies special rate 30% Life assurance Companies  Investment income 20%  Premium income 5.5%  Some companies are exempt from paying income tax (E.g. National Insurance Fund and NWC) General Consumption Tax  Jamaica had a sales tax on luxury items since 1978  The General Consumption Tax Act, 1991.  This is a tax on sales paid by the consumer and collected and remitted by the seller. It can be seen as a value-added tax where tax is paid at successive stages and recovered by the intermediate taxpayers and the cumulative tax is borne by the final consumer.  The tax affects the sale of both goods and services.  Tax rate is 15%  Other Types of Taxes: Trade Licenses Road Licenses Property Taxes Asset Taxes Questions & Answers THE END