Tax is an enforced fee that is charged on individuals and organizations by government or its agency on a product, income, or service. Despite many people complaining of making tax contributions to government, these contributions are very important for the economy of a country. This is because these financial contributions are used by government for the implementation of various socio-economic development projects such as the construction of roads and bridges, schools, health facilities and provision of social services like national security, provision of salaries for civil servants including the police, the army, judges, doctors, nurses and teachers.
However, to clearly understand the rationale behind government charging of taxes terms such as taxation, equity in relation to taxation, direct and indirect tax and sources of income, need to be clearly understood.
Taxation mainly refers to the actual act in which government or its taxing authority (Such as Malawi Revenue Authority) actually collects tax from individuals and organizations. In Malawi, taxation is guided by several principles that are mostly highlighted in the Taxation Act and Amendments.
The taxation principles emphasize that taxes collected should be just-enough to generate revenue required for provision of essential public services, and that taxes must be spread over as wide as possible section of the population, or sectors of economy. Furthermore, taxes are enforced in a manner that facilitates voluntary compliance from individuals and organizations to the maximum extent possible, but also taxes must equally burden all individuals or entities in similar economic circumstances. Adding to this, taxes do not favor any one group or sector over another.
Equity in relation to taxation is another important element that needs to be clear understood as far as taxation is concerned. The word equity centers on the fairness and justness of collecting taxes by government. Equity in relation to taxation implies giving as much advantage and consideration to one individual or organization as it is given to another in similar economic conditions. This is a principle that taxes should be fair and should be based on different people’s ability to pay, and is usually related to their income. Practically, it is expected that an individual that earns more income has to pay more than an individual earning a comparable lower income.
Taxes are divided into two main groups of Direct taxes and indirect taxes. On one hand, the direct taxes can be said to be those paid directly to the government by the individuals or organizations on whom it is being imposed. Examples of direct taxes charged by the Malawi Revenue Authority include income taxes, such Pay As You Earn (PAYE), and as the name implies, is a tax on Income. Income, according to MRA includes the total amount in cash or kind received by or accrued to a person from sources within Malawi, or deemed to be within Malawi. Another form of direct tax is tax based on wealth and this is based on the wealth of an individual at the date of death and is sometimes called Estate Duty. On the other hand, Indirect tax, also referred to as goods and services tax, is a tax collected by an intermediary, such as a retail store from a person who bears the ultimate economic burden of the tax (such as the customer). Indirect taxes are computed in the cost of goods or services an individual or organization purchases. In Malawi an example of indirect tax is sales tax, which is a duty paid based on the value of goods or services that have been purchased. Sales tax in Malawi is known as Value Added Tax (VAT). Customs duty is another form of indirect duties and is tax levied on the value of goods that have been imported into the country. Excise duty is also a form of indirect tax and these are imposed on selected locally manufactured goods to discourage the consumption of such goods.
There are a various number of income sources that are taxable from income an individual or organization earns, which is generally net income from employment, business and rentals. There are many sources of income but the most common are salary and wages, which is the kind of income that the majority of people have to deal with when filing their taxes and is what individuals earn from a job. Another source is self-employment income, which is any money that an individual makes outside a regular job from services rendered. For example, if an individual operates a home-based business, money from this endeavor would be counted as self-employment income. Another type of income that one may receive is interest income, and is the income one receives from putting money into a savings account.
Taxation is a means by which governments finance their expenditure by imposing charges on citizens and corporate entities. The main purpose of taxation is to accumulate funds for the functioning of the government machineries. All governments in the world cannot run its administrative office without funds and it has no such system incorporated in itself to generate profit from its functioning. In other words, a government can run its administrative set up only through public funding which is collected in the form of tax. Therefore, it can be well understood that the purpose of taxation is very simple and obvious for proper functioning of a state. Taxes are charges levied against a citizen’s personal income or on property or for some specified activity. As such, one purpose of taxation is to increase in effectiveness and productivity of the nation as government is able to implement various socio-economic development projects such as the construction of roads and bridges, schools, health facilities and provision of social services.
Another reason is that taxation assists in reducing consumption of unwanted goods. Taxes as such can be used as an effective tool to reduce the consumption of unwanted goods like alcohol. Higher taxes on such goods reduce the consumption as the price of the product will be very high for the consumers. Government also uses taxes as a way to protect local industries and as such make them more profitable. Increasing tariffs on imports and charging lower taxes to local products may boost the demand for goods and services produced by domestic industry. Taxes on imports, which are called tariffs, can be used by government to correct an unfavorable balance of payment situation by increasing the tariffs. This will result in imports becoming expensive and will cause a fall in demand for the imported goods.
Non compliance of tax laws can be said to be a failure, intentional or unintentional, of taxpayers to meet their tax obligations. This lack of compliance can be as a result of different factors as indicated below:
A Rising or High Tax Burden: Individuals and organizations will tend to be non compliant to tax laws when the taxes are deemed to be high as compared with the cost of living. In such a case taxpayers will tend to avoid payment of taxes so as to have a sizeable amount of money to be used in the purchase of different commodities.
Lack of Knowledge on Tax Laws: This point focuses on the unintentional failure of a taxpayer to comply to tax laws. An example would be a small or medium enterprise that does not know that it is required by law for their businesses to be registered and as such pay taxes. Further, taxpayers would like the actual location or requirements needed for them to comply.
Complexity of Tax Laws: Unintentional non-compliance may also be caused by the complexity of tax laws, that is by the difficulty of keeping accurate records and the inability to obtain the information needed to comply. For example, low-income taxpayers who cannot afford to employ tax agents could face problems understanding basic laws and even routine mathematical operations and interpreting the tax tables may present problems.
Tax Evasion: Tax evasion is the failure to declare taxable activity or income and this is a practice in the employment of the services such as consultancies, builders, plumbers and decorators. This intentional non-compliance requires the taxpayer to have some measure of understanding of the tax system.
Weak Tax System: This can also lead to intentional non compliance of tax laws as taxpayers are able to utilize loopholes in the tax system. As such, this encourages taxpayers to be non compliant as they are assured of not facing prosecution.