Types of Taxation

Taxation is the method used by governments to finance their expenditure and imposed on citizens and corporate entities. The systems of taxation vary among countries; that is based on the type of governance in the respective countries. The purpose and the categories of taxation however remains the same in all systems of governance. Taxation is divided into two broad categories: direct taxation which incorporates individual taxation and corporate taxation and indirect taxation.

Individual taxation is one type of direct taxation which is imposed on the income accruing to employed persons.   According to British External environment Government policy, Theory 1 of 25 October 2009;   “this is one of the most important sources of government’s revenue in the taxation system , as it secures revenue in excess of twenty five percent of the total government tax revenue.” It is a tax that cannot be paid or passed on to any other person but paid by the employed person. This type of taxation is based on the principle of ability to pay. Income tax and health surcharge are two examples of taxes paid by individuals. Income tax is imposed on all incomes and the rate of tax increases as income increases. This is based on a pay as you earn (PAYE) system, whereby the more a person earns the more taxes is paid. Income tax rates are regularly adjusted by governments in annual budgets in relation to fluctuations in inflation.   On the other hand, Health Surcharge is a tax that is levied in a two rates system based on the varying incomes of the employed persons.

Another type of direct taxation is corporate taxation which is levied on the profits and short term gains of companies. Corporation taxes are compulsory fees paid directly to the government. Business levy is an example of corporation tax which is “a tax on the gross sales or receipts of companies and self employed persons.”   The system of determining the taxable profit of the companies varies among countries and it is a different...