:: Principles of taxation are thoughts and ideals on how a good tax law should be shaped.
:: In early times, taxation was viewed as an instrument of oppression. However, with societal evolution, taxation began to wear a “human face”.
:: Adam Smith in the Wealth of Nations outlined four principles (canons of taxation) which a good taxation system must have. They include:
1. Equity: this means that the proportion demanded should be proportionate to the taxpayer’s ability to pay. Otherwise, tax evasion or even rebellion may occur. Adam Smith Prefers proportional tax as it prevents distinction and inequality of citizens.
:: The notions of equity and justice may change overtime. E.g. initially, progressive taxes were distasteful and frowned upon. Gladstone was of the view that it tended to communism, distinction and discrimination… but with constant evolution of the states and the growing complexity in capitalism, states are beginning to adopt the progressive system of taxation as a system of social engineering. Note that a tax is progressive where the percentage proportion of tax levied increases with the taxpayer’s income (vertical equity) . A tax is proportional where an equal proportion of tax is paid irrespective of income (for example VAT, PPT CIT). In the UK, 50% tax is charged where a person’s personal income reaches a particular threshold.
:: Again, “equity” demands that penalties for non-compliance should be reasonable.
:: “equity” may also require certain incentives and motivation for the taxpayers. There are various tax allowances, incentives, holidays, etc. under the PITA. For example those that earn less than 300000 shall be charged only 1 percent tax. Also, there is 1percent bonus deducted for taxpayers who remit timeously.
2. Certainty: Tax laws should be comprehensive and clear in order to avoid undue exploitation of the taxpayers by the tax administrators. The proportion, time and mode of payment must be precise and clear so as to encourage tax compliance.
:: The general rule has been that ambiguous tax provisions are construed in favour of the taxpayer-Brandy Syndicate V IRC.
3. Convenience: Tax ought to be levied and collected in an expedient manner (and time) in order to reduce the burden of compliance.
:: Section 80 PITAct introduces a convenient “Pay as You Earn” system which deducts tax from a person’s income at source.
:: Companies Income Tax is payable annually after the company has prepared and concluded its books of account.
:: FIRS and LIRS now have tax calculators which automatically helps taxpayers compute income based on the data they impute.
:: There is now an online platform for remitting and calculating tax liability. These and many others are needed to encourage tax compliance.
4. Administrative efficiency: a good tax law must be complemented by a good administration to enforce its provisions and objectives. The agency responsible for collection and enforcement should be well staffed, equipped and cost effective in carrying out its functions.
Kath Nightingal, in Theory and Practice of Taxation noted that a good tax system must also possess the following:
5. Simplicity: tax laws should be straightforward and simple for the ordinary citizen to understand.
6. Flexibility and stability: to meet the demands of the dynamic society.
7. Neutrality: tax laws should not seek to favour some people at the expense of others… it should not be used as an instrument for political vendetta or oppression.
In conclusion, these principles are neither absolute nor compulsory. However, stakeholders of taxation are to have these at the back of their minds in drafting tax legislations, understanding tax policies and enforcing compliance.
