BALMER PROGRESSIVE SYNDICATE

ECONOMICS
TAXATION
MR ALUSINE KARGBO
CONTACT: +23275049120/+23275049120

What is Taxation?  Tax Payer/Payee: This is the person

paying the tax rate or the amount imposed
Taxation is the process or act of imposing or
on the tax base.
levying tax by a government on individuals, firms
 Disposable Income: This refers to the
and goods and services mainly for the generation
payee’s income having deducted all tax
of revenue.
payments. In other words, disposable
income is the payee’s income after tax. This
What is a Tax?
is also known as net income.
A tax is defined as a compulsory financial charge
TYPES OR FORMS OF TAX
or payment imposed by government on
individuals, firms, properties and other goods and
Generally, all forms of tax may be classified into two
services. A taxation process is a composition of
basic types.
a tax base, tax rate and a taxpayer.
Direct Tax
KEY TAXATION TERMS
Indirect Tax
 Tax Base: A tax base is the item or object on
which the tax is charged or imposed. It could DIRECT TAX
be either on an individual, the income of an
Direct tax describes the category of taxes that are
individual, the profit of firms or the property
imposed on the income of individuals, profit of firms
of someone.
and properties.
 Tax Rate: A tax rate is the percentage value
Types/Examples of Direct Tax
imposed or levied on the tax base.
a. Income Tax
 Tax Payment/Amount: The tax payment is
b. Company Tax
the actual amount or monetary value
c. Death tax/ Inheritance Tax/ Property or Estate
contribute or paid in tax.
Tax

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 BALMER PROGRESSIVE SYNDICATE
ECONOMICS
TAXATION
MR ALUSINE KARGBO
CONTACT: +23275049120/+23275049120

d. Capital Tax dead person. This is one of the reason why it

e. Capital Gained Tax is referred to as death tax and it is imposed
f. Pool tax on property such as land, houses or estate
a) Income Tax: This is the name given to the and cash at bank. The person inheriting the
type of tax that is levied or imposed on the properties shall pay this tax.
income of the working or independent d) Capital Tax: It refers to those taxes that are
population. Having deducted this tax by the imposed on certain capital items that maybe
revenue or tax authority, the remainder or owned by an individual and business enterprises.
balance is known net income or disposable For example machinery, equipment, plants etc.
income. like most direct taxes, it is also progressive in
nature. That is to say, the greater the value of the
Note: Usually, when a worker capital item involved (tax base), the higher would
reaches a certain position, he is be the amount to be paid in tax (tax rate).
entitled to certain allowances that are e) Capital Gained Tax: Capital gained tax is
not taxable. These allowance imposed on the value of capital items such as
contributed to what we call non- machines, and plants with the passage of time. It
taxable income. is the increase in value of the items which may be
liable to the capital gained tax. This form of tax is
b) Company Tax: It is the name given to the
widely used in developed nations but are recently
taxes that are imposed or levied on the profit
introduced in developing nations as West African
of business firm. It is progressive in nature.
countries.
That is, the higher the profit (tax base) the
f) Pool Tax: This tax is imposed on the people of
higher would be the amount of the tax (tax
relatively small communities such as town and
rate).
villages when it becomes necessary to raise fund
c) Death/Estate/Inheritance Tax: These
for a community project such as constructions of
are the taxes that are normally imposed on
schools, feeder roads, community centres, pipe-
the property and money of a deceased or
borne water, electrification project and more.

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 BALMER PROGRESSIVE SYNDICATE
ECONOMICS
TAXATION
MR ALUSINE KARGBO
CONTACT: +23275049120/+23275049120

Note: Pool tax is imposed at flat rate. That and poor by allowing high income earners
is, both the rich and poor pay the same pay more and low income earners pay less.
amount in tax. For this reason, the burden
Disadvantages of Direct Tax
or of tax incidence falls heavily on the
poor.
 Discourages Hard work: Too high direct tax
discourages hard work and this would contravene
Advantages of Direct Tax
the principle of neutrality.
 Easy to Determine the Tax Incident: It is  Encourages Evasion: It is liable to be
relatively easy to determine where the tax evaded by the people by submitting
incidence or burden falls. That is, it is easy to unrealistic returns.
tell between the rich or high income earners  Discourages Savings: High direct tax
and the poor or low income earners who discourages savings and investments which are
suffers the greatest tax burden. necessary tools for economic development of a
 Economical and Fair: The collection of country.
direct tax is cheap and also fair because of  Lacks Popularity: Direct tax are not very
the use of the PAYE system. popular simply because the people bears the
 Direct Tax is Elastic. That is, it can be burden directly and it is usually criticized by the
adjusted base on economic situation. When people when raised.
income increases, government may also
INDIRECT TAX
increase in tax and vice versa.
 Direct tax is progressive in nature. That
Indirect taxes are those tax imposed or levied by
is, the higher the tax base the higher the tax
government on goods and services. Indirect tax exists
rate.
in two categories.
 Bridges Inequality Gap: Direct tax helps
to bridge or reduce the gap between the rich  Specific
 Ad-valorem

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 BALMER PROGRESSIVE SYNDICATE
ECONOMICS
TAXATION
MR ALUSINE KARGBO
CONTACT: +23275049120/+23275049120

Specific Tax/Per Unit Tax: This is a fixed the car. Hence, the more expensive the car, the
amount of indirect tax that is imposed per unit of more the tax and the less expensive the car, the
specific goods and services on the basis of the lesser the tax you pay.
nature of the product regardless of the value. For
example, if Le 10,000 tax is set on specific car Note: Ad-valorem indirect tax is based on
the value or cost of the item and not on
imported, means, cars of any brand or value
which are imported into the country will attract the nature of the item and it is always
charged in percentage. Ad-valorem is
Le10,000 tax regardless of its value. Another
example could be, Le 10,000 per gross of Latin word or phrase that literarily means

cigarette means, cigarettes of any value will ”according to value”.

attract Le 10,000 per each gross.

Types/Examples of Indirect Tax

Note: Specific form of indirect tax does

a) Custom Duties/Tariff (import and export
not look at the value of the item, but the
duties)
nature or type of the item and it is
b) Sales Tax
imposed on unit basis of the product at a
c) Excise Duty
fixed amount. It is not charge in
d) Value Added Tax (VAT)/Goods and
percentage.
Services Tax(GST)
a) Custom Duty/Tariff: This is an indirect
Ad-valorem Tax: This type of indirect tax is
tax imposed or levied on both imported and
imposed on the goods and services on the basis
exported commodities. The tax imposed on
of the value of the item and not on the nature
import (commodities that are coming into
of the product. Ad-valorem tax is expressed in
the country) is known as import duty and
percentage and not on a fixed amount. For
the tax imposed on export (commodities
example, if a government is practicing ad-
going out of the country) is called export
valorem tax, 30% on imported cars means that,
duty.
30% tax will be charged on the cost or value of

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 BALMER PROGRESSIVE SYNDICATE
ECONOMICS
TAXATION
MR ALUSINE KARGBO
CONTACT: +23275049120/+23275049120

Note: Custom duty is also known as tariff by Kadco, Star Beer produces by Sierra
and it divides into import duty and export Leone Brewery Limited, and Grafton Water
duty whether it is through land, sea or air. produce by Grafton Limited.

b) Sales Tax: This indirect tax is imposed on d) Value Added Tax: A value added tax (VAT) is a
certain goods. Sales tax is also known as consumption tax placed on a cost price of the
purchase tax. It is again called purchase tax product whenever value is added at each stage of
simply because the tax is paid by those who the supply chain, from production to the point of
buy those product that are affect by tax. sale. This tax is otherwise known as Goods and
Purchase or sales tax is regressive in nature. Services Tax (GST) in other countries as Sierra
That is, the higher the tax base the lower the Leone.
tax rate. Hence, the burden of the tax falls
Note: VAT is based on the taxpayer’s
more on the low income earners or the poor.
consumption and not on the taxpayer’s
Sales tax is accessed and collected at the end
income and it propositional is nature. That
of the supply chain.
is both rich and poor pay equally. It is
charges on the cost price.
Note: Sales or purchase tax is paid by the
buyer of the product at the point of
purchase and the burden of tax incident
WHY INDIRECT TAXES ARE
falls more on the poor or low income
IMPOSED/IMPORTANCE OF INDIRECT TAX
earners.
 Revenue Generation: Government imposes tax
c) Excise Duty: This is an indirect tax
generally on goods and services to generate
imposed on certain goods and services
revenue to respond to public responsibilities.
produced within the country. For example,
 Protection of New or Infant Industries
an excise duty is imposed or levied on
against Competition: Government imposes
manufactured goods as Bitter Cola produces
indirect tax on the goods and services

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 BALMER PROGRESSIVE SYNDICATE
ECONOMICS
TAXATION
MR ALUSINE KARGBO
CONTACT: +23275049120/+23275049120

produced by those developed or well  Retaliation against other Nations: Political

established firms to protect those new or differences is common with international trade. A
infant firm against competition. government may choose to impose high tax
 Protect Local Industries: Local industries (import duty) on certain goods from one particular
are those firms own by the state or the country with political differences as a retaliation.
citizens of that country. In order for foreign
firms within the country or foreign product Advantages of Indirect Tax
coming into the country not to outshine or  Economical: The method of collecting indirect
crippled those local ones producing related tax is also cheap or economical
product, the government imposes more tax  Difficult to Evade: Indirect tax is hard to evade
on them as compare to the local firms. or avoid, simply because they are paid as the
 To Discourage the Availability of product is bought or before released in custom.
Harmful Product in the Country: There  Protection of infant firms: It helps government
are certain products that a government may to protect infant or new firms against competition
want discourage their consumption or with those already developed and established
availability within the country because it ones.
considers them harm. In order to this, it  Protection of Local firms: It also help
imposes high tax on them which in return government to protect locally own firms against
makes the selling prices more high so that the competition with foreign ones.
consumers may be discouraged to buy them.  Convenient: Tax payers do not feel the burden
Such items may be alcohol and harmful drugs of indirect tax too much as indirect taxes are
as cocaine ad more usually paid in small amount.
 Preventing Dumping of Good: A country  Elastic/ flexible: Indirect tax is also flexible.
(especially non-industrialised) imposes tax on That means, it can be easily adjusted by the state
imported goods to prevents dumping of when necessary.
goods by industrialized or advanced nations.  Encourages Hard work: When indirect
tax are properly used, it can encourage hard

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 BALMER PROGRESSIVE SYNDICATE
ECONOMICS
TAXATION
MR ALUSINE KARGBO
CONTACT: +23275049120/+23275049120

work simply because people will like work FUNCTIONS/IMPORTANCE OF TAXATION

hard to make money that will make them (direct and indirect)
bale to demand for certain goods and
 Revenue Generation: The basic function or
services.
important of taxation is to generate revenue for
the government to take care of its recurrent and
Disadvantages of Indirect tax
capital expenditure.
 It leads to inflation: This is because, taxes
 Protect New or Infant Industries against
imposed on goods and services leads to high
Competition: with indirect tax government can
selling price which leads to inflation.
protect new or infant firm against competition
 Heavy burden on the poor: The tax burden
with developed or well established firms.
falls heavily on the poor because it is usually
 Protect Local Industries: with indirect tax
regressive in nature. That is, the higher the
again, government can protect local firms from
tax base (the value of the item) the lower the
been outshined or crippled by foreign firms
tax rate (the amount to be paid in tax).
through competition.
 Fall in Living Standard: Indirect tax leads
 To Discourage the Availability of Harmful
to a fall in the standard of living simply
Product in the Country: Government uses
because it tends to increase the prices on
taxation to discourage the importation and
goods and service which leads to inflations.
consumption of product considered harmful to
This make people not to demand so as to their
human health as alcohol, cocaine and marijuana
material wellbeing.
by imposing high tax on them which in return
 Encourage Tax evasion: although indirect
makes their selling prices more high so that the
tax is difficulty to evade, however, people can
consumers may be discouraged to buy them.
evade them through black market.
 To Minimize the Inequality Gap: The
inequality gap is the gap between the rich and the
poor. Government uses taxation to redistribute
income and minimize this gap.

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 BALMER PROGRESSIVE SYNDICATE
ECONOMICS
TAXATION
MR ALUSINE KARGBO
CONTACT: +23275049120/+23275049120

 Use as Inflationary Measure: Government For example

uses taxation as a fiscal measure to control
inflation. One way inflation can arise is when Income Income Tax Rate

the demand is greater than supply (demand

Earners Base(LE) (%)
pull inflation). Control controls this by raising
Mr Kargbo 500,000 5
the taxes on income which in turn reduces the
Mr Bangura 1,000,000 10
real or disposable income of consumers and
reduces their purchasing ability above supply. Regressive Tax System

TAX SYSTEM Under this tax system or method, the tax rate (the
percentage value the taxpayer pays in tax) decreases
A tax system describes the method which may be
as the value of the tax base (the object been taxed)
followed by a country or state. Basically, three
increases. That is to say, under regressive tax system,
main system can be used to measure a tax.
high income earners pay less percentage rate in tax

Progressive Tax System than low income earners. For this reason, the burden
of taxation falls heavily on the low income earners or
Under this tax system or method of taxation, the the poor.
tax rate (the percentage value the taxpayer pays
in tax) increases as the value of the tax base (the Income Income Tax Rate

object been taxed) increases. That is to say,

Earners Base(LE) (%)
under progressive tax system, high income
Mr Kargbo 500,000 10
earners pay high percentage rate in tax than low
Mr Bangura 1,000,000 5
income earners. For this reason, under
progressive tax system, the burden or incidence
of tax falls heavily on the rich or high income
earners.

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 BALMER PROGRESSIVE SYNDICATE
ECONOMICS
TAXATION
MR ALUSINE KARGBO
CONTACT: +23275049120/+23275049120

Proportional Tax System say, people earning the same income and
having the same responsibility must contribute
With this system of taxation, both the high
the amount in tax. it is important to note that
income and low income earners pay the same
the progressive system of taxation fulfils this
percentage value in tax.
principle of equity. This is simply because, under
the progressive system, the amount contributed
Income Income Tax Rate
in tax increases progressively as the value of the

Earners Base(LE) (%) object been taxed increases.

Mr Kargbo 500,000 10
Economical or Economy: This is also one of the
Mr Bangura 1,000,000 10
cannon of taxation. According to the principle of

Under proportional tax system, although both the economy, the method used for collection of taxes

high and low income earners contribute the same must be economical or cheap. That means, the cost

percentage value in tax, the high income earners of collecting a form of tax must not exceed the

pay more in real value than the low income revenue that may be realized from the collection

earners. However, the tax incident falls heavily on of the taxes. This is why the P.A.Y.E (Pay as You

the low income earners or the poor. Earn) system is recommended as an economical
system of tax collection.
PRINCIPLES OR CANNON OF TAXATION
Certainty: This principle states that tax payers
It is important to note that any form of taxation must be fully informed about their tax
is govern by principles or cannon. These cannon contribution so that they may be able to work
or principles include the following: out their tax reduction themselves. When this
happens it helps to eliminate incident of tax
Equality or Equity: According to the principle
avoidance and taxation evasion. Tax avoidance
of equity, a good tax system must be faired.
is where the taxpayer tries to find fault with the
That means, people must be made to contribute
tax system and therefore uses it as an excuse
taxes according to their ability to pay. That is to

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 BALMER PROGRESSIVE SYNDICATE
ECONOMICS
TAXATION
MR ALUSINE KARGBO
CONTACT: +23275049120/+23275049120

or pretext to avoid the payment of taxes. Tax Neutrality: This principle or cannon states that, a
evasion on the other hand is a situation in which good tax system must not interfere or intervene the
the tax payer refuses to pay his tax contribution. production by discouraging hard work. This is because
This is considered as offence by law and is if taxes are extremely high some workers may decide
punishable by the court of law. not to engage in production. When this happens it will
affect total or aggregate output within a given period
Convenience: According to the principle of
of time thereby slowing down the rate of economic
convenience, the period of tax deduction as well
growth.
as the method used must be convenient or
comfortable to the tax payer. This is why the PROBLEMS/ CHALLENGES/DRAWBACKS OF
P.A.Y.E. system of tax deduction is considered to TAX COLLECTION IN WEST AFRICA
be a convenient system. By means of this method
As West Africa countries are underdeveloped. Tax
all tax deduction are made at based before the
collection is faced with many difficulties. These
net payment are made.
include:
Flexibility: According to this principle, a good
 Corruption: West Africa countries are full of
tax system must be flexible and not rigid. That is
corruption. Tax collected can be misappropriated
to say, it should be possible for the tax rate to be
or embezzled by the tax authorities or the revenue
adjusted, either to be increased or decreased
officials which in turn discourages the mercies to
whenever it is necessary. For example, if it
pay tax.
becomes necessary for government to generate
 Lack of Proper Business Records: Most
more revenue it should be possible for taxes to
businesses in West Africa do not keep accurate
be raised and vice-vasa. It follows therefore that,
record or prepare account on their day to day
a rigid form of taxation will not satisfy this
business activities. This makes it difficult for the
principle of flexibility.
revenue authority to charge tax on them
accordingly.

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 BALMER PROGRESSIVE SYNDICATE
ECONOMICS
TAXATION
MR ALUSINE KARGBO
CONTACT: +23275049120/+23275049120

 Increase Rate of Tax Evasion and QUESTIONS ON DATA RESPONSE

Avoidance: In West Africa, majority of the
Note: The rest of the other data response
people lack the culture of paying tax. As a
questions shall be taken directly from the
result of this, they either evade tax or avoid
past papers while in class:
them or find fault to avoid them.
 Poverty: West Africa countries are very poor.
Hence, the high level of poverty among the JUNE 2015
people makes it very hard for people to
respond to tax obligation. The table below shows the incomes and rates of
 High Level of Illiteracy: West Africa income tax levied on four professionals in an
countries have high rate of illiteracy among economy.
its citizens make it difficult for them to Professionals Income Tax Disposable
understand the importance of tax obligation. Per Income($)
Rate
 Low Level of Technology: most tax Month($)
(%)
institutions in West Africa lack the need
Doctor 8,000 10
technology for the set up of an effective and
robust tax system. Engineer 7,000 12

 Poor Tax Education: Tax awareness or Civil Servant 5,000 18

sensitization in West Africa is very poor. Nurse 6,000 15

Hence, this contribute the high level of tax

avoidance.

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 BALMER PROGRESSIVE SYNDICATE
ECONOMICS
TAXATION
MR ALUSINE KARGBO
CONTACT: +23275049120/+23275049120

Use the above data to answer the questions b) i). Identify the system of taxation employed in
that follow: column A and B
ii). Which of the income earners has the least burden
a) Calculate the disposable incomes of the
under column B?
four individuals.
c) i). If government increases its rate of taxation to
b) What system of taxation was employed?
15% flat rate, how much revenue will be
c) Give reasons for your answer in (b).
generated from the payees?
d) With the aid of a diagram, explain the
ii). At 15% flat rate taxation, calculate the
system of taxation employed in (b)
disposable incomes of Jawara, Ade, Eke and Audu

JUNE 2003

OBJECTIVES
The table below shows the tax payment of four
income earners in a year. Use the information in TAXATION
the table to answer the questions that follow. 1. A worker earns $80,000.00 per annum. He/She
pays $4,000.00 as tax. What percentage of
Income Income Tax Payments (N) his/her income does he/she pay as tax?
Earners Base A B A. 10%
B. 8%
Jawara 15,000.00 1,500.00 1,200.00 C. 5%
Ade 25,000.00 2,000.00 2,000.00 D. 4%
2. A tax expressed as a percentage of the value of a
Eke 32,000.00 3,200.00 2,240.00
commodity is
Audu 60,000.00 6,000.00 3,000.00 A. Specific tax
B. Ad valorem tax
a) Determine the percentage rate of taxation C. Regressive tax
D. Progressive tax
paid by: 3. Which of the following is not a direct tax?
i. Jawara in column A and B A. Income tax
B. Import tax
ii. Audu in column A and B
C. Company tax
iii. Ade in column B D. Capital gains tax
iv. Eke in column B

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 BALMER PROGRESSIVE SYNDICATE
ECONOMICS
TAXATION
MR ALUSINE KARGBO
CONTACT: +23275049120/+23275049120

4. If a tax rate is 15% and a worker earns $490 Use the information contained in the table above to
monthly, how much would he pay as tax? answer questions 7 and 8
A. $74.5
B. $73.5 7. What is the total revenue from indirect taxes?
C. $72.5 A. $686.00m
D. $69.5 B. $400.20m
5. Disposable income is the income earned C. 4135.80m
A. By the nationals of a country resident D. $100.00m
within the country. 8. What is the total revenue from non-tax sources?
B. From productive activities of nationals of A. $400.20m
a country both at home and abroad. B. $375.20m
C. When personal income tax is deducted C. $135.80m
from personal income D. $75.00m
D. When the gross income of an individual is
added to personal income tax. 9. If demand is perfectly inelastic, the incidence of a
tax is borne by the
6. Ten bags of wheat bought for $50 by a flour A. Buyers
miller were sold for $65. What is the value B. Buyer and sellers
added tax payable by the flour miller if the tax C. Government
rate is 5%. D. Producers
A. $7.50
B. $3.25 10. Income is distributed when the rich are
C. $2.25 progressively taxed and
D. $0.75 A. More private schools are established
Expected Revenue B. Subsidy is provided on petroleum
Items Amount($m) products
Rents and 75.00 C. More public goods are provided
royalties D. Farmers are given guaranteed prices
Company 150.00 11. The item or object on which a tax is imposed is
income Tax known as:
Customs and 300.20 A. Tax rate
excise duties B. Income tax
Personal 80.00 C. Tax base
income tax
D. Disposable income
Value added 100.00
tax

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ECONOMICS
TAXATION
MR ALUSINE KARGBO
CONTACT: +23275049120/+23275049120

12. The feature of “elastic” of a good tax system D. Properties

means that the tax is:
A. Fair 18. An indirect tax is imposed at a fixed amount on
B. Cheap per unit of certain items is called
C. Convenient A. Ad-valorem Tax
D. Flexible B. Income Tax
C. Specific tax
13. The percentage value to be paid in tax is
D. Tax rate
called
19. Ad-valorem tax is charged on the
A. Tax base A. Nature of the item
B. Tax rate B. Quantity of the item
C. Tax payment C. Size of the item
D. Disposable income D. Value of the item
14. A tax system where high income earners pay 20. Custom duty is also known as
less tax in percentage is known as: A. Good and Service Tax(GST)
A. Proportional system B. Value Added Tax (VAT)
B. Progressive system C. Tariff
C. Regressive system D. Import Duties
D. Tax incident
21. A tax imposed on certain goods and service
15. The following are examples of direct tax,
produce internally is known as
except:
A. Direct tax
A. Import duty
B. Sales tax
B. Pool tax C. Excise duty
C. Income tax D. Externality
D. Company tax
16. Tax imposed on people living in a small village 45. Ad-valorem tax is based on a/at
or town to raise fund necessary for A. fixed amount
community project as electricity, water supply B. Percentage
is known as: C. Import duties
A. Local tax D. Custom duties
B. Inheritance tax 46. If Mr Kargbo is contributing 5% of his Le100,000
C. Income tax monthly earning to tax and Madam Edwina is also
contributing 5% of her Le50,000 monthly earning to
D. Pool tax
tax, the tax system adopted is
17. Value Added TAX(VAT) is based on the
A. Proportional system
payee’s B. Regressive system
A. Income C. Progressive system
B. Consumption D. Specific system
C. Salary

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 BALMER PROGRESSIVE SYNDICATE
ECONOMICS
TAXATION
MR ALUSINE KARGBO
CONTACT: +23275049120/+23275049120

47. The income after taxation is known as

A. per capital income
B. real income
C. gross income
D. disposable income
49. Under progressive system, the tax incidence i

falls heavily on the:

A. Low income earners
B. Payee
C. High income earners
D. Government
50. Tax incident is the comparison of the burden
between the:
A. Government and payee
B. Tax base and tax rate
C. Tax payer and payee
D. Rich and poor

i
Mr Alusine Kargbo/075049120/099188730

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