Question

Describe the different approaches and analysis on global taxation

Answer 1

Taxation is a major source of revenue for Governments. The government of every country, whether directly or indirectly, is taxing the Goods and services, and the income of individuals. There are two approached to taxation:

1. Direct Tax

2. Indirect Tax

We'll discuss Direct Tax first. Direct Tax is a way of taxing the Individual persons. Person's can be Individuals, Corporations, Partnership Firms etc. The income earned by these is directly taxed based the amount earned by them in a year. However, there are certain distinctions. For an Individual earning salary, no expense of any nature is allowed to be deducted from the total income, except some standard deductions and exemptions. Hence, any expense of personal nature like fooding, lodging, etc are not deducted from the total income.
For Corporations and Business Firms, there is a tax on the net profit earned by them. Hence, from the Revenue earned, expense incurred in earning that revenue can be deducted to arrive at the net profit. This net profit is subject to tax. However, there are situation where some expense of personal nature are not allowed to be deducted from this Revenue, are disallowed while arriving at net profit.

There are other Gains, like gains of Capital nature (on Sale of Property, Estate), where tax is levied on the net gains after considering the cost of purchase and the related expenses after indexing the cost to the current period.

Now comes, Indirect Tax. Indirect Tax consists of taxing the Product or Service. Most common form of Indirect Tax is the Sales Tax or Value Added Tax. This implied that the tax is paid on the Value added in the product. UAE is one the countries that have imposed VAT. VAT is imposed by the State Governments and is collected on every sale of a product, till the final consumer sale has been done. Hence, from the Manufacturer, Distributor, Wholesaler to Retailer, at every point of sale, VAT is imposed.

The Second Indirect Tax is on the Manufacture of a Product. Normally called excise duty, it is imposed on the manufacturing of a product. Usually, this is an old form of taxation. This is superseded by the Goods and Service Tax(GST). The GST is imposed on the supply of a Product or Service. Further, the input tax paid on acquiring a product or service is used as credit. This enables seamless flow of credit and cost of a product reduces.

Now lets discuss some facts. Most of the countries are imposing both Direct and Indirect Tax. However, there are some countries, where no form of taxation is there. These are safe heaven. Here, small countries with low GDP, are not taxing the Individuals nor any product or service. Due to this, several MNCs are setting up their headquarters in these tax heavens and getting away from payment of taxes. This is a form of tax evasion. Huge amount of tax is avoided by global corporations and it has a lasting effect on the economy. Many companies have been involved in scams that unearthed huge amounts of tax being avoided in a range of ways.