CONCEPTS OF TAXATION

Definition of Terms
TAXATION is defined in many ways.
Commonly heard definitions include:

It is the process by which the sovereign, through its law making
body, races revenues use to defray expenses of government.
It is a means of government in increasing its revenue under the
authority of the law, purposely used to promote welfare and
protection of its citizenry.
It is the collection of the share of individual and organizational
income by a government under the authority of the law.
 Concept of Taxation

Taxation is the inherent power of the state to

impose and demand contribution upon
persons, properties, or rights for the purpose of
generating revenues for public purposes.

The power of taxation upon necessity and is

inherent in every government or sovereignty.
Principles and Theories of Taxation
 The Benefit Principle. This principle holds the individuals
should be taxed in proportion to the benefits they receive from
the governments and that taxes should be paid by those people
who receive the direct benefit of the government programs and
projects out of the taxes paid.

 The Ability-to-Pay Principle. This principle holds that taxes

should relate with the people’s income or the ability to pay,
that is, people with greater income or wealth and can afford to
pay more taxes should be taxed at a higher rate than people
with less wealth. Ex. Individual income tax.

 The Equal-Distribution Principle. This principle that

income, wealth, and transaction should be taxed at a fixed
percentage; that is, people who earn more and buy more
should pay more taxes, but will not pay a higher rate of taxes.
 Structures of a Tax System
 A tax is proportional. Meaning the government takes an amount of
money from a person which is indirect proportion to his income. Ex.
Ben salary is 10,000pesos and the government is deducting 10% of his
salary for tax. After a year his income increases to 15,000pesos and the
governments now deducts 12% of his salary for tax. The said tax is
proportional.
 A tax is regressive. Meaning that the governments takes a larger
percentage of a persons income per tax, while he is receiving a lower
income. Ex. Ben’s salary 10,000pesos and government is asking him to
pay 15% of his salary for tax which is contrary to our given example in
number 1.
 A tax is progressive. Meaning that the government takes a lager
percentage of his salary for tax due to his high salary. Ex. Ben has a
monthly income of 30,000pesos and the governments deducted 20% of
his salary for tax. The tax amount is proportionately equal to someone’s
status in the society. A rich man should pay more than a poor man.
 Significance of Taxation

Primary purpose: generates funds or revenues use to defray

expenses incurred by the government in promoting the general
welfare of its citizenry.

Other purposes:
 to equitably contribute to the wealth of the nation

 to protect new industries

 to protect local producers

 Characteristics of Tax
 It is enforced contribution. Its payment is not voluntary
nature, and the imposition is not dependent upon the will of
the person taxed.

 It is generally payable in cash. This means that payment by

checks, promissory notes, or in kind is not accepted.

 It is proportionate in character. Payment of taxes should be

base on the ability to pay principle; the higher income of the
tax payer the bigger amount of the tax paid.

 It is levied (to impose; collect) on person or property. There

are taxes that are imposed or levied on acts, rights or
privileges. Ex. Documentary tax.
 It is levied by the state which has jurisdiction over the person
or property. As a general rule, only persons, properties, acts,
right or transaction with in the jurisdiction of the taxing state
are subject for taxation.

 It is levied by the law making body of the state. This means

that a prior law must be enacted first by the congress before
assessment and collection may be implemented of the 1987
constitution.

 It is levied for public purposes. Taxes or imposed to support

the government for implementation of projects and programs.
 Basic Principles of a Sound Tax System

 Fiscal adequacy. Means that the sources of revenue taken as a whole should
be sufficient to meet the expanding expenditures of the government regardless
of business, export taxes, trade balances, and problems of economic
adjustment. Revenues should be capable expanding or contracting annually in
response to variations of public expenditures.

 Equality or Theoretical Justice. Means the taxes levied must be base upon
the ability of the citizen to pay.

 Administrative Feasibility. This principle connotes that in a successful tax

system, such tax should be clear and plain to taxpayers, capable of enforcement
by an adequate and well-trained staff of public office, convenient as to the time
and manner payment, and not unduly burdensome upon on discouraging to
business activity.

 Consistency or Compatibility with Economic Goals. This refer to the tax

laws that should be consistent with economic goals or programs of the
government. This are the basic services intended for the masses.
 Classification of Taxes
1. As to subject matter
 Personal, Poll or Capitation Tax (ex. Residence Tax)
 Property Tax. (ex. Real State Tax)
 Excise Tax (ex. RVAT)

2. As to who bears the burden

 Direct Tax (ex. Income Tax)
 Indirect Tax (ex. Buying of goods and services (RVAT) )

3. As to determination of account
 Specific Tax (ex. Taxes on wines)
 Ad Valorem Tax (ex. Tax according to value such as Real
Estate Tax.
4. As to purpose
 General Tax (ex. Almost All Taxes)
 Special Tax

5. As to scope
 National Tax (ex. National Revenue Taxes)
 Local Tax
 Distinction of Tax
Tax distinguished from Toll
- A tax is demand of sovereignty, while toll is demand for
proprietorship.
- A tax is paid for the use of the government’s property, while
a toll is paid for the use of another’s property.
- A tax may be imposed by the government only, while a toll is
enforced by the government or a private individual or entity.

Tax distinguished from Penalty

- A tax is intended to raise revenue, while penalty is designed
to regulate conduct.
- A tax may be imposed by the government only while a
penalty may be imposed by the government or a private
individual.
Tax distinguished from Debt
- A tax is base on law, while a debt is based on contract.
- A tax may not be assignable, while a debt is assignable.
- A tax is generally payable in cash, while debt is payable in
cash or in kind.
- A person may be imprisoned for a non-payment of taxes, but
any person may not be imprisoned for non-payment of debt.

Tax distinguished from other Terms

- Revenue. This refers funds or income derived by the
government whether from tax or any other source in another
sense.
- Internal Revenue. It refers to taxes imposed by the
legislature other than duties on imports and exports.
- Customs Duties. These are taxes imposed on goods exported
into a country.
 Entities Exempted from Taxation

 Religious Institutions
 Charitable Institutions
 Non-Profit, Non-Stock Educational Institutions
 Non-profit Cemeteries
 Government Institutions
 Foreign Diplomats
 Situs of Taxation

Situs is a latin term which means “situation”,

“location”, or “place.” In short, its literal meaning
refers to a place taxation. In real property, the rules is
tax is imposed to a place or state where the property
is located and subject to be tax has a jurisdiction over
the said property.
 Double Taxation
 Direct Duplicate
Elements:
 Taxing twice
 By the same taxing
authority
 Within the same taxing
jurisdiction
 For the same purpose
 In the same taxable period
 Involving the same purpose
 Indirect duplicate
Indirect duplicate taxation,
on the other hand, occurs
when taxes on the property
are not imposed by the same
taxing authority. The local
and national governments
imposed taxes on the same
property during one taxable
period. This kind of
imposition is legal.
 Forms of Escape from Taxation
6 forms of escape from taxation
1. Shifting. It is one way of passing the burden of tax
from one person to another. Ex. Taxes paid by the
manufacturer may be shifted to the consumer by
adding the amount of the tax paid to price of the
product.
Kinds of Shifting
 Forward shifting occurs when the burden of the tax is
transferred from a factor of the production to the factor of
distribution.
 Backward shifting occurs when the burden of tax is transferred
from the consumer to the producer or manufacturer.
 Onward shifting occurs when tax is shifted to two or more
times either forward or backward.
2. Capitalization. This refers to the reduction in the price of
the tax object to the capitalized value of future taxes which
the purchaser expects to be called upon to pay. Ex: A
reduction made by the seller on the price of the real estate,
in anticipation of the future tax to be shouldered by the
future buyer.

3. Transformation occurs when the manufacturer or producer

upon whom the tax has been imposed pays the tax and
endeavor to “recoup” (make up for) himself by improving
his process of production

4. Tax Evasion is the practice by the taxpayer through illegal

or fraudulent means to defeat or lessen the amount for tax.
This is also know as “tax dodging.”
5. Tax Avoidance is the exploitation by the taxpayer of legally
permissible methods in order to avoid or reduce tax liability.
This is also known as “tax minimization.”

6. Tax Exemption is the grant of immunity or freedom from a

financial charge or obligation or burden to which others are
subjected.
Grounds for tax exemption:
Contract, wherein the government is the contracting party.
Public policy
Reciprocity
THE END