What is Tax | Types of Tax (Direct and Indirect) and examples of Numerical Problems

TAX

A tax is a compulsory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund various public expenditures.

TYPES OF TAX

There are following types:

·         Direct taxes:

·         In- Direct taxes:

Direct taxes:

A direct tax is paid directly by an individual or organization to the imposing entity (Government).

Direct taxes are based on the ability-to-pay principle. This economic principle states that those who have more resources or earn a higher income should pay more taxes. The ability to charge taxes is a way to redistribute the wealth of a nation. Direct taxes cannot be passed onto a different person or entity; the individual or organization upon whom or which the tax is levied is responsible for the fulfillment of the full tax payment. Direct taxes, especially in a tax-bracket system, are thought by some to be a disincentive to work hard and earn more money because the more money a person earns, the more taxes they pay.

Types of Direct Taxes

1.     Income tax

It is based on one’s income. A certain percentage is taken from a worker’s salary, depending on how much he or she earns.

2.     Transfer taxes

The most common form of transfer taxes is the estate tax. Such tax is levied on the taxable portion of the property of a deceased individual, including trusts and financial accounts.

3.      Gift Taxes

A gift tax is the tax on money or property that one living person gives to another. Items received upon the death of another are considered separately under the inheritance tax. Many gifts are not subject to taxation because of exemptions given in tax laws.

4.     Entitlement tax

Such type of direct tax is the reason why people enjoy social programs like Medicare, Medicaid, and Social Security. The entitlement tax is collected through payroll deductions and is collectively grouped as Federal Insurance Contributions Act.

5.     Property tax

Property tax is charged on properties like land and buildings and is used for maintaining public services like the police and fire departments, schools and libraries, as well as roads.

6.     Capital gains tax

Such type of tax is charged when an individual sells assets such as stocks, real estate, or business. The tax is computed by determining the difference between the acquisition amount and the selling amount.

In-Direct Taxes:

Indirect taxes are basically taxes that can be passed on to another entity or individual. It is usually imposed on a manufacturer or supplier who then passes on the tax to the consumer.

Indirect taxes are commonly used and imposed by the government in order to generate revenue. They are essentially fees that are levied equally upon taxpayers, no matter their income, so rich or poor, everyone has to pay them. But many consider them to be regressive taxes as they can bear a heavy burden on people with lower incomes who end up paying the same amount of tax as those who make a higher income.

The goods and services tax (GST) is a tax on goods and services sold domestically for consumption. The tax is included in the final price and paid by consumers at point of sale and passed to the government by the seller.

The GST is usually taxed as a single rate across a nation.

Types of Indirect Taxes

Here are some of the types of indirect taxes.

1.      Sales tax

Whenever people go to the malls or department stores to shop, they are already about to pay indirect taxes. Goods such as household items, clothing, and other basic commodities are subject to such types of taxes. Upon payment at the counter, the final sale price is padded with a sales tax that the store collects and pays to the government.

2.      Excise tax

Excise tax is also very common. When a manufacturer buys the raw materials for the company’s products, for example, tobacco for cigarette companies, they already need to pay indirect taxes on the items. Through a part of the normal course of business, the manufacturer can pass on the burden to the consumers by selling the cigarettes at a higher price.

3.      Customs tax

Ever wonder why imported products are expensive? It is because of customs tax. When a container filled with bananas from another country enters the Pakistan, the importer pays indirect tax (customs tax), which is then passed on to the consumers.

4.      Gas tax

Yes, buying gasoline for vehicles contains an indirect tax.

ETC.

NUMERICAL PROBLEMS

(A)          FOR INCOME TXES

·        Roberts annual salary amount to €35,750. He tax credit is €2260. If he pays tax at the rate of 22%, calculate his annual net income.

Solution:

Gross income = 35750 x 0.22   (at 22%)

                      = 7865

Payable tax    = gross income (at 22%) - credited tax

                      = 7865 – 2260

                      = 5605 

Net income    = gross income – payable tax

                      = 35750 – 5605

                      = €30145

·        Katie is paid €14.60 an hour. She works 39 hours a week. Her tax credit for the week is €57and the standard rate for the tax is 22%.

Find her:

                    I.            Gross income for the week.

                 II.            Income tax she pays.

       III.            Take-home pay for the week.

Solution

I.             

Gross income = 14.60 x 39

                 = € 569.40

II.             

Gross tax = 569.40 x 0.22

                 = 125.27

Income tax       = gross tax – tax credit

                 = 125.27 – 57

                 = €68.27

III.             

Take-home       = gross income – income tax

 pay for week

                 = 569.40 – 68.27

                 = € 501.13

NUMERCAL PROBLEMS

(B)          FOR GST

Find the amount of bill:

MRP = Rs 50,000, Discount % = 20%, GST = 28%

Solution

Discount = 20% of 50,000

              = (20/100) x 50,000

              = Rs 10,000

So,

Selling price   = 50,000 – 10,000 = Rs 40,000

(discounted value)

GST       = 28% of 40,000

              = (28/100) x 40,000 = Rs 11,200

 

Thus, the amount of bill = Selling price + GST

              = 40,000 + 11,200

              = Rs 51,200