Both direct and indirect taxes are critical components of government revenue as they are intricately linked with the overall economy. Collection of these taxes is important for the government as well as the well-being of the country.
Required:
Distinguish between direct taxes and indirect taxes and suggest THREE ways by which tax collection can improve. (5 marks)
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A direct tax is one that the taxpayer pays directly to the government. These taxes cannot be shifted to others. A homeowner pays personal property taxes directly to the government. In a general sense, a direct tax is one imposed upon an individual person (juristic or natural) or property (i.e. real and personal property, livestock, crops, wages, etc.) as distinct from indirect tax imposed upon a transaction. In this sense, indirect taxes such as a sales tax or a value added tax (VAT) are imposed only if and when a taxable transaction occurs.
Ways of Improving Tax Collection by the State:
- Educating taxpayers about how to comply, and benefits of paying taxes to the nation.
- Ensure regular updates to the taxpayer registry.
- Simplify the tax system to encourage formalization.
- Create external checks that enforce compliance.
- Focus resources on improved auditing, processes, and tools.
- Use simple segmentation to identify larger collection opportunities.
- Target collections in the tax offices with the largest outstanding debts