Introduction to Income Tax

mojoki · 2014-05-12T08:18:59+00:00

Introduction to Income Tax Income tax defined : In an effort to define the term "income tax", we need to ascertain the exact meaning of the term "income". Income can be defined as some benefit, monetary or otherwise, which an individual "enjoys" periodically. This definition is somehow in-comprehensive since it is hard to define enjoyment. In the efforts to derive a meaning of the word income, economists evolved what they call "equity or economic concept" and accountants evolved what they call "realization concept". Income is viewed as the "value of equity" or "gain on sale" by "economists" and "accountants" respectively. Equity Concept: Economists view income as the value of equity. Here equity is the difference between assets value and liabilities value. Under this view, Income is valued as the economic gain or change in wealth or accumulation or equity at the end of the accounting period or some other duration of time. A valuation is made at the beginning and at the end of a period and any change is ascertained. This concept concentrates on the value of wealth or anything that makes an individual better off economically. This concept has been criticised on the grounds that unreal paper gains, like appreciation of capital assets on revaluation or future expectations of wealth is considered as income. Realization Concept: This concept is More popular than the equity concept & widely adopted both by tax officials, tax lawyers and tax practitioners. Under this concept, Income arises only at the time of sale, disposal or exchange of a product or goods, which creates the income or gain. Therefore income is not realized earlier at the production stage during which period an asset is held while it's values or prices rise (inflationary gains). The only definition that has been found to be completely consistent and free from anomalies and capricious results is "accrued income," which is the money value of the goods and services consumed by the taxpayer plus or minus any change in net worth during a given period of time. (Tax experts commonly call this the Haig-Simons definition of income, based on work by American economists Robert M. Haig and Henry Simons.) This definition cannot be applied without important modifications. First, many tax codes do not consider as taxable income those changes in net worth resulting from gifts, bequests, and other gratuitous transfers. Second, because of the difficulties of estimation, most accretions to wealth are ordinarily not included in an individual's taxable income until they are "realized"-that is, converted into cash or some easily valued form. Finally, and for much the same reason, most countries have chosen not to include in taxable income such forms of imputed income as the rental value of owner-occupied homes. Conwi v. CTA [213 SCRA 83]: Income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest, or profit from investment. Commissioner v. BOAC [149 SCRA 395]: Income means "cash received or its equivalent." It is the amount of money coming to a person within a specific time. It is distinct from capital for, while the latter is a fund, income is a flow. As used in our laws, income is flow of wealth. The source of an income is the property, activity or service that produces the income. For the source of income to be considered as coming from the Philippines, it is sufficient that income is derived from activity within the Philippines. IN BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. Fisher v. Trinidad [43 Phil 973]: Stock dividend is not an income. It merely evidences the interest of the stockholder in the increased capital of the corporation. An income may be defined as the amount of money coming to a person or corporation within a specified time, whether as payment for services, interest, or profit for investment. A mere advance in the value of property of a person or corporation in no sense constitutes the "income" specified in the revenue law. Such advance constitutes and can be treated merely as an increase of capital. An income means cash received or its equivalent. It does not mean choses in action or unrealized increments in the value of the property. Income v. capital: Capital is a fund or property existing at one distinct point of time while income denotes a flow of wealth during a definite period of time. The essential difference between capital and income is that capital is a fund or property existing at one distinct point of time; income is a flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time. Capital is wealth, income is the service of wealth. [Madrigal v. Rafferty, 38 Phil 414]. Capital is the tree while income is the fruit. Sources of Income: The term "source of income" is not a place but the property, activity or service that produced the income. In the case of income derived from labor, it is the place where the labor is performed; in the case of income derived from the use of capital, it is the place where the capital is employed; and in the case of profits from the sale or exchange of capital assets, it is the place where the sale or transaction occurs. Commissioner v. BOAC: The source of an income is the property, activity or service that produces the income. For the source of income to be considered as coming from the Philippines, it is sufficient that income is derived from activity within the Philippines. IN BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made in Philippine currency. The site of the source of the income is the Philippines and the flow of wealth proceeded from and occurred in Philippine territory, enjoying the protection accorded by the Philippine government. Thus, said flow of wealth should share the burden of supporting the government. Exempt Income Vs Income Exempt : Exempt Income - all income that is not charged tax because the source is exempt. In other words, the income does not form part of the total income to be included in the income tax return (e.g. domestic-benefits (service from a wife/husband), occupying own premises, utilizing own agricultural produce, scholarship income, etc.). Income Exempt - all income that is accrued or derived from a source that forms part of the tax base, but because of some specific/particular circumstances and by the operation of any regulation, law, order or rule, such income is exempt from income tax (e.g. minimum threshold for employment income - if the total income of an individual for a certain month does not exceed Tshs 170,000 then this income is exempt, the salary of the President of the URT is also exempt) Income Tax: Income tax has been defined as a tax on all yearly profits arising from property, profession, trade or business, or as a tax on a person's income, emoluments, profits and the like. It is generally regarded as an excise tax. It is not levied upon persons, property, funds or profits but upon the right of a person to receive income or profits. Purposes of income taxation: To provide large amounts of revenues; To offset regressive sales and consumption taxes; Together with estate tax, to mitigate the evils arising from the inequalities in the distribution of income and wealth, which are considered deterrents to social progress, by imposing a progressive scheme of taxation. Advantages of Income Tax : Income tax is advantageous than tax on consumption.This comes from the fact that: People are taxed based on total income, thus people who make less theoretically pay less tax on earnings. Not all people consume at the same rate, therefore tax on income is a more equitable way of assessing tax than with a consumption tax. People with lower incomes would be the most impacted by a straight tax on consumption, since even necessary items would be significantly more expensive. Income is an easier way to levy taxes and decide deductions. While people may deal with a few pay stubs they have to save, in consumption tax, people might have to save receipts for every purchase they made during a year in order to qualify for tax breaks. Disadvantages of Income Tax : Some disadvantages of a tax on earnings include: The collection of a tax on earnings is generally thought to more difficult than a consumption tax which would be levied at the point of sale. For the those in the middle class and lower classes, an earnings tax may be a financial hardship, regardless of the amount. Some believe that income tax is a violation of a citizen's individual freedom. Especially Libertarians argue that tax on earnings violates the individual's right to decide how to use the money he earns. People paid "under the table" may be able to evade paying any income taxes. In this world nothing is certain than Tax and Death.

Thread starter mojoki
Start date May 12, 2014

mojoki

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Introduction to Income Tax

mojoki

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