What is tax, and why is taxation important in a modern economy?
Definition of taxes: Taxes are payments that each person, family, or company must make to the State to help pay for collective needs, thus contributing a part of their income.
Taxes are among the most important sources through which public revenues are obtained. With them, the State obtains sufficient resources to carry out its functions, such as administration, infrastructure development, or the provision of services.
Classification of taxes
Taxes can be classified in various ways according to their characteristics. The first classification is the distinction between direct and indirect taxes.
Direct taxes are those that fall directly on a person, company, or other entity, since they are based on economic capacity, such as the possession of an estate or the receipt of income. Among the direct taxes, we have the income tax of individuals, corporate tax, and inheritance and gift tax.
Indirect taxes: contrary to the previous ones, indirect taxes are imposed on goods and services and the transactions carried out with them; that is, when a purchase of goods or services is made, for example, people pay a tax indirectly. The tax does not fall on the specific person, even if that person pays it, but on the good or service that is acquired. Examples of indirect taxes include VAT, property transfer tax, and excise taxes on alcoholic beverages.
We have a second classification, which differentiates taxes as proportional, regressive, and progressive.
Proportional taxes: the fee payable is calculated through a fixed percentage, such as VAT. The tax base or income of the individual subject to the tax is not taken into account.
Regressive taxes: the higher the profit or income, the lower the percentage of taxes that must be paid. An example would be VAT on basic goods, since it affects a greater proportion of the incomes of individuals with lower earnings.
Progressive taxes: the higher the profit or income, the higher the percentage of taxes that must be paid. An example would be income tax.
Speaking of taxes means addressing an important issue, whatever the country in which one lives, because taxes are part of the tax systems implemented in each region of the world, and their purpose is to promote the welfare of society through different actions of governments.
In generic terms, we talk about taxes when we refer to what we pay to the government, although it is more correct to speak of tributes. The word tribute comes from the Latin tributum, which represented in antiquity what was paid to the tribe; this involved the distribution of a part of personal gain for the maintenance of collective life. A tax is a type of tribute, as are rights and exploitations in Mexico and taxes and social contributions in Colombia (Internal Revenue Service, n.d.).
Taxes provide the government with the resources necessary to carry out public spending, which contributes to the economic development and social welfare of a country. Tax is generally paid on personal income obtained but also on activities such as selling, leasing, and providing services. The most common taxes in tax systems around the world are income tax and value-added tax (VAT), since these generate more than 50% of the income of countries that have established them.
Taxes also contribute to the progress and stability of our countries by improving the economy, with the essential aim of the modern State being to serve the community and promote the prosperity of its inhabitants. Most modern constitutions provide for citizens’ obligation to make contributions toward such purposes, as illustrated by the following figure:
In a survey conducted among students and professors of the Higher Technological Institute of El Mante in Mexico, they were asked about the utility of taxes, and their perceptions were recorded:
To provide public services such as lighting, water, and drainage.
To create new infrastructure such as roads, hospitals, and airports.
To grant support to society in the form of scholarships or recreation areas.
To cover the salaries of employees of public institutions.
It is important to note that, although they have not yet entered the labor market, the young students know that they have an obligation to pay taxes. The foregoing makes evident the utility of tax-culture awareness programs promoted by tax authorities, such as SAT in Mexico and DIAN in Colombia, since the compliance rate in our countries is very low compared with that of other countries such as Denmark, where some of the highest taxes in the world are paid in exchange for public services.
Taxation system in Pakistan and discuss its overall structure within the country.
Main taxes in the Pakistan Tax System
We must bear in mind that some taxes are at the state level and others, on the contrary, are the responsibility of Autonomous Communities or local authorities; therefore, those that are not managed by the State will not always have to coincide.
- Tax on the Challenge of Individuals (IRPF)
- Corporation Tax (IS)
- Non-Resident Income Tax
- Wealth Tax
- Inheritance and Donations Tax
- Value Added Tax (VAT)
- Tax on Patrimonial Transmissions and Documentary Legal Acts (ITPAJD)
- Special taxes
- Tax on Insurance Premiums
- Economic Activities Tax (IAE)
- Real Estate Tax (IBI)
- Tax on Mechanical Traction Vehicles (IVTM)
Sections. Tax system and Tax legislation
(Analyze the effectiveness of these systems and legislation and recognize weak areas to suggest improvements. The improvements have to be justified to develop an effective tax system and legislation that meets key principles in a global context.)
Give the general overview of the selected System in India and the UK.
Compare and contrast Pakistan’s taxation system with India and UK.
(The area of discussion should also be based on trade blocs where member countries may not have implications for their national taxation systems. For instance, Pakistan is a member of SAARC and SEO, but neither of the two blocs has any impact on its members’ national tax systems. The UK, on the other hand, is a member of the OECD, which publishes its model tax convention to encourage countries to comply with it. Pakistan, the UK, and many other countries are members of the WTO, which affects the taxation regimes of its member states. Pakistan and the UK themselves have a double-taxation treaty that affects them directly, and so on (OECD, 2021).)
Task 2 (2500)
Organizations are formed as uniquely operated incorporated entities; in both cases, they are liable to be taxpayers and are regulated by legislation. The choice of an organization to operate as a unique corporation or incorporation is mainly determined by the tax liabilities imposed on it, for example:
- The Ghazi Brother Dam project in Pakistan was executed by four companies that worked together in partnership to complete the project.
- The newborn hydroelectric power plant project has several investors, companies, and individuals working on it who have formed an incorporation limited by shares to execute an 84-megawatt power-generation unit. The incorporation will dissolve after the completion of the contract.
Both of the above examples involve companies falling under different tax legislation and having different tax liabilities. The choice of whether an incorporation was formed is not stated. The investors would have been guided by such considerations, among others.
Explore the characteristics of incorporated organizations, giving examples of these types of legislation. Also, explain the advantages and disadvantages of operating an incorporated organization and the tax liabilities for such organizations. Select an incorporated organization, collect data on its accounts, calculate its tax liability based on this data, and interpret it by using recognized models and formulas.
For incorporated organizations, explain the difference between private and public incorporations, giving examples of each type of company. Go on to explain the difference in taxation liabilities for such companies. Further, in the relevant scenario, Les House Limited has prepared its statement of profit and loss with other comprehensive income, but its profit before tax has not been adjusted. Your task is to find the adjusted profit before tax and interpret the results using appropriate formulas and models.
On a final note, highlight the difference in taxation liabilities between public, private, and incorporated organizations and identify which organization would be more suitable for each kind of business activity.
Task 3 (1300 Words)
Having studied the details of taxation in different types of organizations, you are required to summarize in a report the relevant legislation affecting these different organizations at regional, national, and international levels where applicable. For example, at the regional level, a country can define tax-free or tax-subsidized loans for industrial development. At the national level, a country can set rebates for export promotion or tax exemptions for foreign-exchange remittances. At an international level, a country can define various duties, such as anti-dumping duties, for items such as tinplate, imported cars, paper, etc.
Besides legal constraints, there are ethical considerations to be taken into account when running an organization. Paying a fair amount of tax in a country is seen as a social responsibility and moral obligation on the part of the organization to provide a source of funds for public services such as healthcare, education, and infrastructure. These public services, in turn, benefit the company directly or indirectly. Tax evasion has been branded as an immoral and unethical practice that undermines the very integrity of the tax system. Explain what is meant by ethics in the domain of incorporated and unincorporated organizations. How does the emphasis on ethical constraints differ from nation to nation? How can ethical constraints be applied consistently across different cultures? Does bringing uniformity to the operations of multinational organizations help? (Byars & Stanberry, 2018).
Consider ethical constraints on different organizations using one example organization of each type, including incorporated and unincorporated public and private organizations. How do such regulations benefit or disadvantage the organizations? Conclude the extent of this impact on organizations and critically evaluate the impact on each type of organization and what each organization can do to respond to and minimize the impact of such legal and ethical constraints. Possible compliance methods can include recording transactions, reporting income for taxation, and defining the role of organizations as collectors of tax, for example, VAT, National Insurance, Income Tax, etc. Support your conclusions with examples from a range of international organizations. Are those methods effective in minimizing the impact of legal and ethical constraints? How else can these organizations be more socially responsible in conducting their activities?
References
Internal Revenue Service. (n.d.). Taxpayer Bill of Rights. https://www.irs.gov/taxpayer-bill-of-rights
OECD. (2021). Building tax culture, compliance and citizenship. OECD Publishing. https://doi.org/10.1787/18585eb1-en
Byars, S. M., & Stanberry, K. (2018). Business ethics. OpenStax. https://openstax.org/books/business-ethics/pages/1-introduction
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