LRA Tax Practitioner Training

Module I
Introduction To Taxation
Liberia Revenue Authority
Monrovia
June 2021
OBJECTIVES OF THIS MODULE

• LRA plans to train all Tax Practtioners on the basic tax system
and tax administration.
• Various modules are developed on all the major taxes, including
Personal Income Tax, Corporate Income Tax, Excise Tax, Goods
and Services Tax, and Value Added Tax and all the major tax
functions such as Taxpayer Service, Filing, Payment and
Penalties and Enforcement.
• This is the first module of the LRA Tax Practitioner Training on
introduction to taxation
• It intends to train tax practitioners on basic concepts of taxation.
• Liberian taxes and tax administration will be covered by other
modules.

2
CONTENTS

• Introduction: Definition and Classification of Taxes

Slides 4-9
• Evolution of Taxes Slides
10-11
• Rationale of Taxes Slides
12-15
• Important Tax Terminologies Slides
16-29

3
1.1 Introduction: Definition of
tax

• The Shorter Oxford English Dictionary defines tax as a

compulsory contribution to the support of government
levied on persons, property, income, commodities etc.
• In general, tax is a compulsory payment levied by a
government on a taxpayer in order to fund government
activities.
• Tax is levied under a law approved by the National
Legislature and a failure to pay, along with evasion of or
resistance to taxation, is punishable by law.

4
1.2 Introduction: Classification
of taxes

• Taxes can be classified in many different ways as follows:

• Traditionally, taxes are divided into direct and indirect taxes.
However, as economically such a classification does not
make much sense, its use has been gradually decreasing.
• Presently, taxes are divided into income, commodity and
property taxes as per their bases.
• International Monetary Fund (IMF) Government Finance
Statistics (GFS) classifies taxes into four groups, viz.; income
taxes, property taxes, domestic trade taxes and international
trade taxes.
• Currently many countries around the world, including
Liberia classify their taxes as per IMF GFS classification.
5
1.3 Introduction: Features of
direct/indirect taxes

Direct Taxes Indirect

taxes
• Legal taxpayer and • Legal taxpayer and
real taxpayer is the real taxpayer are
same person different persons
• Tax burden cannot be • Tax burden can be
shifted to other shifted to other
persons
persons
• Direct contact
between the tax
• No direct contact
administration and between tax
real taxpayer administration and
real taxpayer
6
1.4 Introduction: Examples of
direct/indirect taxes

Direct Taxes Indirect

taxes
• Personal income tax • Customs duties
• Corporate income tax • Excise tax
• Real estate tax • Import/manufacturing
• Net worth tax
level sales tax
• Inheritance tax
• • Wholesale sales tax
Property transfer tax
• Retail sales tax
• Multiple stage sales
tax
• Value Added Tax
7
1.5 Introduction: Income, commodity and
property taxes

This classification divides taxes into three groups on the basis of their
base as follows:
• Income taxes: Taxes levied on income such as profit, salary/wages,
interest, rent, dividends, royalty, and capital gains are known as income
taxes. Tax levied on the income of natural persons and proprietorship
firms is known as personal income tax while on the income of legal
entities, including private limited companies, public limited companies,
partnerships and other organizations is called corporate income tax.
• Property taxes: Taxes levied on property such as annual land and
building tax on holding of property, property transfer tax on transfer of
ownership of property, and net worth tax on accumulation of property
are classified as property taxes.
• Commodity taxes: Taxes levied on production, importation,
exportation, purchases, sales or uses of commodities (goods and
services) are called commodity taxes.

8
1.6 Introduction: IMF GFS classification
of taxes

• Currently, IMF GFS classification is being used by many

countries around world, including Liberia. According to this
classification taxes are divided into four groups as follows:
• Income taxes: personal income tax, corporate income tax,
and social security contributions.
• Property taxes: land and building (real property) tax,
property transfer tax, net worth tax, estate, inheritance and
gift taxes.
• Domestic trade taxes: excise duties and sales taxes
(manufacturing/wholesale/retail level sales tax, turnover
tax, VAT/GST).
• International trade taxes: import duties and export
duties.
9
2.1 Evolution of Taxes: General
development

• Taxes are as old as the government.

• Taxes were levied by the first government to
generate revenue to operate government functions.
• There has been an increase in the number of taxes
over the years to finance increasing government
activities.
• Now taxes are levied by all kinds of countries: rich
or poor, big or mall, and developed or developing.
• Now a days, taxes are considered as prices paid for
a civilized society.
10
2.2 Evolution of Taxes: Important
development
Important development of major taxes around the world:
•In the USA, an excise tax on whiskey was enacted for the first time in
1791.
•In Great Britain, income tax was introduced in 1799.
•In the USA, while personal income tax was initiated with the passage
of the Revenue Act of 1861, the tax was repealed ten years later and
the origin of the income tax on individuals is generally cited as the
passage of the 16th Amendment, passed by Congress on July 2, 1909,
and ratified February 3, 1913.
•In Europe, multiple stage Sales tax was developed during the first
world war.
•In Great Britain Purchase tax was introduced in 1940
•The concept of VAT was developed in Germany in 1819, its detailed
structure was developed for Japan in 1949 but it was actually
introduced in France in 1954. By 2021, this tax is levied by over 170
countries around the globe
11
3.1 Rationale of Taxes:
Objectives

Taxes are levied for various purposes as follows:

• Revenue generation

• Social objectives

• Economic objectives

12
3.2 Rationale of Taxes: Revenue
generation

• Taxes are levied mainly to generate revenue.

• Revenue is needed to run government, including the
provision of public goods and services, like national
defense, dispensation of justice, maintenance of
public order by the police, transport infrastructure
(roads, bridges, ports etc.), government-funded
education, government-funded health care, social
assistance and so on.
• In any country, taxation has been the main source of
generating revenue for the government.

13
3.3 Rationale of Taxes: Social
objectives

• Taxes are levied in order to achieve social objectives.

• For example, taxes are levied in order to reduce income
inequality in the society. That is why, first bracket of
income known as basic allowance is exempt and higher
income is subject to progressive rates under the personal
income tax system in order to reduce income inequality.
• Taxes are also used to check consumption of those goods
that are socially undesirable, such as alcoholic beverages
and tobacco products. To this end, excise duties are levied
on these items around the world.
• Similarly, luxuries goods and services are taxed in order to
discourage luxury consumption.

14
3.4 Rationale of Taxes: Economic
objectives
Taxes are also levied to achieve a number of economic
objectives. For example:
• Import duties are levied to protect domestic
industries against competition from abroad in order
to promote internal production.
• Exports are relieved from taxes in order to promote
exports.
• Lower tax rates or exemptions are adopted to
encourage certain activities though such measures
are generally not effective in achieving intended
objectives.
• Similarly, in times of economic crisis, tax rates may
be reduced, and during a boom the tax rates may be
increased to avoid overheating of the economy.
15
4.1 Important Tax Terminologies:
Progressive tax

• Progressive tax system refers to the tax

system under which the average rate of tax
(i.e. share of tax in taxpayers income)
increases as income increases.
• The personal income tax is levied with
progressive rates i.e. an increasing proportion
of income must be paid in tax as the income
Rat increases, with a few exceptions.
e

16

Income
4.2 Important Tax Terminologies:
Proportional tax

• Flat rate taxation occurs where a single rate of tax is

applied regardless of the amount of income.

• Business profit tax is commonly levied at a flat rate.

17
4.3 Important Tax Terminologies:
Regressive tax
• Tax which takes greater percentage of a lower income than a
high income i.e. the tax is higher for a low-income earner than a
high-income earner.
• The term is also used to refer to system where the tax rate is
reduced as the tax base rises. For example where income from
100- 300 is taxed at a rate of 10%, income from 300-600 at a
rate of 7% and income from 600-900 at 5%.
• Taxes levied on goods and services are generally regressive
taxes since they apply across the board to all sales regardless of
the purchaser’s income. The burden of the tax falls more heavily
on those who are less able to pay.
Rate

18
Income
4.4 Important Tax Terminologies:
Impact, shifting and incidence of tax

» Impact is regarded as the effect on the person who

must pay the tax in the first place, although if he is able
to pass the burden on to someone else, the incidence
will be upon the latter person

» Taxes levied on goods and services are normally

intended to fall upon consumption and borne by
consumers. An entrepreneur who pays the tax on his
supplies of goods and services in general passes on the
tax or shifts it forward to the consumers by means of
higher prices

» Incidence is amount of tax, which an individual

ultimately has to bear
19
4.5 Important Tax Terminologies: Tax
base

•Amount upon which the assessment or

determination of tax liability is based. For
example:
•taxable income is the tax base for income
tax
•customs value is the base of imports
duties, and
•value added is the base of value added
tax.
20
4.6 Important Tax Terminologies: Uniform /
dual / multiple tax rates

• Taxes can be levied with a:

• uniform rate,
• dual rates, or
• multiple rates.
• For example, sales tax can be levied with a:
• flat rate i.e., single rate,
• dual rates. For example, higher rate on luxuries and
lower rate on other items, or
• more than two rates, depending upon the nature of
goods.

21
4.7 Important Tax Terminologies: Specific
vs. ad valorem tax rates

• Tax rates can be fixed on specific or ad valorem basis.

• Under the specific method, taxes are levied according to
the unit of weight, volume, quantity or some physical
units, such as litres of alcohol, packet of cigarettes,
kilogram of sugar and so on. Excise tax rates on tobacco
products, alcoholic beverages and fuels are almost
universally fixed on specific basis around the globe.
• Under the ad valorem method, rates are expressed as
proportion of price, such as 10 percent of price. Value
added tax is lived with ad valorem rate globally.

22
4.8 Important Tax Terminologies: Juridical
double taxation

• Juridical double taxation arises when there is an

imposition of comparable taxes by two or more tax
jurisdictions on the same taxpayers in respect of the
same taxable income or capital. Such double taxation can
arise in a domestic or in an international context.
• Domestic double taxation arises when comparable taxes
are imposed within a federal state by various levels of
governments.
• International double taxation arises when comparable
taxes are imposed in two or more states on the same
taxpayer in respect of the same taxable income or capital
e. g. where income is taxable in the source country and in
the country of residence of the recipients of such income.
23
4.9 Important Tax Terminologies:
Economic double taxation

• Economic double taxation arises if more than one

person is taxed on the same item. For example, multiple
stage sales tax, where tax is levied on the same good at
different stages.
• Another form of economic double taxation arises where
a company is charged to tax on its profits and its
shareholders are taxed separately on the dividends paid
out of those taxed profits.

24
4.10 Important Tax Terminologies:
Efficiency

• Efficiency indicates a situation where economic decisions are

made without regard to tax consequences.
• In other words, tax consideration should be irrelevant in
choosing between various forms of investment or business
organization; from a tax point of view there would be no
advantage in choosing one particular form of investment or
business organization because income generated will
ultimately be subject to the same amount of tax.
• Economic efficiency is obtained when all goods and factors
of production in an economy are distributed or allocated to
their most valuable uses and waste is eliminated or
minimized.
25
4.11 Important Tax Terminologies:
Vertical vs. horizontal equity

• Vertical equity requires that a taxpayer of greater

ability-to-pay should pay proportionately more taxes
than those with less ability-to-pay. Thus the vertical
equity criterion refers to unequal treatment of
taxpayers in unequal circumstances.

• The criterion of horizontal equity emphasizes the

equal treatment of taxpayers in equal circumstances.
Taxpayers with equal ability to pay should contribute
the same amount of a tax.

26
4.12 Important Tax Terminologies: Ability
to pay principle

• Ability to pay principle advocates the imposition of tax on

the basis of the ability to pay tax of a taxpayer.

• This means that individuals with higher income or greater

wealth should pay more tax than with lower income or
lesser wealth.

27
4.13 Important Tax Terminologies: Benefit
principle

• Benefit principle advocates that taxes should be levied in

accordance with benefits arising from the government
services provided by the tax. In other words, those who
benefit more from public services should pay more tax.
• It is to be noted that the benefit principle is not easy to
operationalize in the design of taxes. Because whenever we
can nail down which exact individual or legal person
benefits from government services, it could be attempted
to charge a user fee.
• Almost all taxes go in the general fund. Earmarking is not
the standard and is controversial, because it reduces the
flexibility of the budget. So there are situation where it is
difficult to link benefit and tax strictly.
28
4.14 Important Tax Terminologies: Elasticity
and buoyancy

• Tax revenue increases because of increase in national

income and discretionary changes (i.e. changes in rates,
bases, imposition of new taxes and improvement in tax
administration).
• Buoyancy indicates the relationship between tax and
income, i.e., the percentage change in tax revenue that
is associated with a one per cent change in income. It
simply links observed values of tax revenue and national
income, which measures change on a gross basis.
• The automatic growth (i.e. increase in tax revenue only
because of increase in National Income) is measured by
income elasticity. Elasticity tries to measure change on a
net basis.
29
END OF MODULE I ON INTRODUCTION TO
TAXATION

Thank You!