types of tax, direct and indirect taxes

types of tax in Nigeria, direct and indirect taxes, There are two major types of tax in Nigeria These are direct tax and indirect tax. In this very post, I am going to give a deep description of the meaning of direct and indirect tax payment and collection processes in Nigeria

There are various types of taxes imposed by governments to generate revenue for public expenditure and to regulate economic activities. Here are some common types of taxes:

Income Tax: This tax is levied on the income earned by individuals, corporations, and other entities. It is usually calculated based on the individual\’s or company\’s taxable income after accounting for deductions and exemptions.

Sales Tax: Also known as Value Added Tax (VAT) or Goods and Services Tax (GST) in some countries, sales tax is imposed on the purchase of goods and services. It is typically a percentage of the purchase price and is collected by the seller, who then remits it to the government.

Property Tax: This tax is levied on the value of real estate properties, including land, buildings, and sometimes personal property. Property taxes are usually collected by local governments and used to fund public services and infrastructure in the area.

Capital Gains Tax: It is a tax imposed on the profit realized from the sale of capital assets such as stocks, bonds, real estate, or other investments. The tax is typically based on the difference between the purchase price and the selling price of the asset.

Estate Tax: Also referred to as inheritance tax or death tax, the estate tax is imposed on the transfer of property or assets after a person\’s death. It is based on the total value of the estate and is paid by the beneficiaries or heirs.

Excise Tax: Excise taxes are imposed on specific goods and services, often considered to be harmful or non-essential, such as tobacco, alcohol, gasoline, and luxury items. The tax is usually included in the price of the product and collected by the manufacturer or retailer.

Payroll Tax: This tax is withheld from employees\’ wages or salaries by employers and is used to fund social security programs, Medicare, and other government benefits. Both employees and employers typically contribute to payroll taxes.

Customs Duty: Customs duties, also known as tariffs, are taxes imposed on goods imported or exported between countries. They are used to protect domestic industries, regulate trade, and generate revenue for the government.

Corporate Tax: It is a tax imposed on the profits earned by corporations or businesses. The tax rate may vary depending on the jurisdiction and the size of the company.

If you have questions bordering on the issues of tax collection and types of tax please feel free and leave a message behind. So on this premise, I am going to start by treating direct tax, so here you will understand what direct tax stands for, so come with me let me explain what are direct and indirect taxes types of tax in Nigeria

What is Direct Tax?

Meaning of direct tax. Direct tax is a type of tax as the name implies refers to the type of tax imposed directly on income of individuals or organizations by the government or its agency.

Such income would include wages, salaries, profits, rents and interests. The burden of direct tax is borne by the payers. The taxpayers are usually aware of the payment of such tax.

The following is a list of direct taxes, feel free to explore the differences between direct and indirect taxes types of tax in Nigeria

Personal income tax: This is the type of tax levied on the income of an individual, usually during a period of one year. In this type of tax system, individuals are granted certain rebates such as whether he or she is married, the number of children, etc and the balance of the income is then taxed.

In Nigeria, personal income tax is based on pay as you earn (P. A. Y.E). In this system, individuals are made to pay according to their income and ability to pay. Personal income tax is usually progressive, i.e. the rate of tax increases as the income of the individual increases.

Company Tax: Company tax is a type of direct tax, also called corporate tax, is the tax levied on the profits made by a company. Allowance is given to companies in the area of expenditure and the balance, called net profit is taxed.

Poll tax: This is the type of direct tax operated on a flat rate basis, usually imposed on the income of some individuals. The tax is said to be regressive of his income.

Capital tax: This type of direct tax is levied on property or on capital assets. Such properties may include land, cars, personal houses, etc. When tax is levied on the properties or assets of a dead person, such capital tax is called death duty. It is levied on the person who inherits the such property of direct and indirect taxes types of tax in Nigeria

Capital gains tax: A capital gains tax is the type of direct tax levied on the gains or profits derived from the sale of land and capital assets. An increase in the value of capital assets is referred to as capital gain.

Expenditure tax: This is the type of direct tax which is actually spent. It is not a very common tax in developing countries but it is used to encourage savings.

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Advantages or Merits of Direct Taxes

They are progressive in nature: Income tax is usually administered with a graded scale, i.e. the more or the higher an income the more tax the person has to pay as its different from direct and indirect taxes

They are non-inflationary: They do not increase price and, therefore, are not inflationary because money is taken from consumers and their purchasing power is thereby reduced.

Reduce inequality of income: Direct taxes are used to ensure the redistribution of income as the poor pay less while the rich pay more. By so doing, it ensures redistribution of income.

Easy estimation of revenue: Revenue accruing from direct taxes can easily be estimated by the government or its agency.

Certainty in tax liability: In direct tax, the payer knows what to pay while the government knows what is expected to be collected as tax.

They are cheap to collect: Under the RA.Y.E system, the cost of collecting direct tax is usually very small.

They are convenient to payers: Direct tax is imposed on individuals’ or firms’ income based on their ability to pay.

Such payments are usually at the convenience of the payer, e.g. personal income tax is deducted from the salaries of workers by the end of the month and the remaining amount, referred to as disposable income, is free for the owner to use or spend.

Disadvantages or Demerits of Direct Taxes

They reduce savings: When tax is removed from one’s income, savings may become very difficult.

They discourage investment: High tax on individuals and corporate bodies discourages potential investors from investing.

They are prone to evasion: Direct taxes are usually prone to evasion by many income earners.

They are inconvenient: Taxpayers always feel the pains any time a certain amount of money is deducted from their salaries.

Disincentive to hard work: High incidence of tax can discourage people from working hard as they always believe that the more one works hard, the higher the tax one has to pay,

They reduce purchasing power: When tax is imposed on the income of a worker, the balance may be small, thereby reducing the purchasing power of such income earners.

Difficulties in proper assessment: Direct tax may be difficult to assess, especially when many companies declare false profits.

What is Indirect Taxes?

Meaning: Indirect taxes refer to taxes which are imposed or levied on goods and services. The producers or sellers bear the initial burden of tax before shifting them to the final consumers in the form of higher prices.

Unlike a direct tax, the taxpayers under indirect tax are usually not aware of the amount being paid for such tax.

Types of indirect taxes

Custom duties of tariffs: These are grouped into two:

Import duties: Import duties are taxes levied on goods imported or brought into the country from other countries. They are paid initially by the importer. The main purposes of import duties are to generate revenue for government, reduce importation of non-essential commodities, to protect infant industries, and also to prevent the dumping of goods.

Export duties: These are taxes levied on goods sent out (or exported) to other countries. Such tax is paid by the exporter.

Excise duties: Excise duties are taxes levied on certain goods produced within the country, i.e. locally manufactured goods.

Sales tax: This is the type of tax levied on the sale of certain commodities. The tax is collected either at the wholesale or retail stage and passed on to consumers in the form of higher prices.

Purchase tax: This is the type of tax levied on certain consumer commodities such as cars and television sets. The tax is usually collected at the wholesale stage. It is based on the value of goods under consideration. Luxury goods attract higher purchase tax than essential goods.

Value-added tax (VAT): This is the type of tax imposed on goods and services at each stage of production. The burden of taxation is finally borne by the final consumers. VAT is used to generate revenue for the government. types of tax in Nigeria

Classification of indirect tax

Advalorem tax: This is a form of indirect tax imposed on commodities in accordance with their respective values v and at a specific percentage of tax. Luxury goods attract a high percentage of tax than essential goods.

Specific tax: In this type of indirect tax,

a fixed sum is imposed or levied per unit of a commodity, irrespective of its value, e.g. equal percentage of tax is levied on both luxury and essential commodities… $\"direct$

Advantages or Merits of Indirect Taxes

Source of government revenue:

Indirect tax is used to generate substantial revenue for the government.

Less burden of tax: The consumer usually pays a smaller amount of tax, thereby experiencing less burden

Protection of infant industries: Indirect tax can be used to protect infant or local industries when heavy taxes are imposed, on imported goods.

To correct the balance of payment deficit: If a country exports less and imports more, a balance of payment deficit will occur. In order to correct the situation, high import duties are imposed to ensure improvement in the balance of payment.

To check the importation of harmful commodities: Commodities that are considered harmful are taxed heavily in order to discourage their importation.

To regulate the production and consumption of harmful goods: Goods considered as being harmful can be taxed heavily to prevent their production and consumption.

Easy and cheap to collect: As soon as a consumer purchases a taxed commodity, he has paid the tax.

Prevention of dumping: High import duties can be imposed on certain imported goods as a way of discouraging the dumping of such goods.

It bridges the gap between the rich and the poor: This is achieved through, high taxes imposed on luxury goods consumed or used by the rich.

It leads to fewer squabbles: This is because the buyer of the commodity is not aware of the amount he is paying as tax when he purchases the commodity.

They are not easy to evade: Once the buyer purchases the commodity, he indirectly pays the tax.

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Disadvantages or Demerits of Indirect Taxes

Indirect taxes are regressive: In this manner, the burden of tax falls heaviest on those with smaller incomes as both the rich and the poor pay the same amount of money on the same type of goods.

High cost of collection: Taxes accruing from indirect taxes are difficult and expensive to collect and remit to the appropriate quarter.

They are inflationary in nature: Since the producer’s costs of production are increased by taxation, they would charge high prices. If such taxes are high, this may lead to inflation.

It could lead to industrial unrest: An increase in the price of commodities will warrant demand for higher wages by workers and if such demand is not met, it could lead to inflation.

Difficulties in its determination: Indirect tax is always prone to difficulties in determining the actual amount to be paid as tax.

Uncertainty in revenue generation: The amount of revenue that can be generated from indirect tax cannot be calculated with any degree of certainty. direct and indirect taxes

It discourages investment: High customs duties on raw materials or finished products do discourage prospective investors.

It increases prices of commodities: Indirect taxes are incorporated into goods and services. They are thus passed to final consumers who buy them at higher prices.