(a) With examples. distinguish between direct and indirect tax, [8 marks] (b) Explain any four problems of tax collection in any West African country. [12 m...

Answer Details

(a) Direct tax versus indirect tax.

• Direct tax is a tax levied directly on the income or property of individuals and firms, where the person taxed also bears the burden and cannot easily shift it to another. The impact and the incidence fall on the same person. Examples: personal income tax (PAYE), company (corporate) tax, capital gains tax, and property tax.
• Indirect tax is a tax levied on goods and services, where the tax is collected from one person (for example the trader) but its burden can be shifted to another (the final consumer) through higher prices. The impact and the incidence fall on different persons. Examples: import and export duties (customs duties), excise duties, value added tax (VAT), and sales tax.

In short, a direct tax is paid on what you earn or own and cannot be shifted, while an indirect tax is paid on what you spend and its burden can be passed on.

(b) Four problems of tax collection in a West African country.

1. Widespread tax evasion and avoidance. Many taxpayers deliberately understate their incomes or fail to pay, and self-employed people whose incomes are hard to assess escape the net.
2. Inadequate and dishonest tax personnel. Shortage of trained, honest tax officials, together with corruption and collusion, leads to under-assessment and loss of revenue.
3. Absence of proper records and a large informal sector. Poor record-keeping, illiteracy, and a large number of small, unregistered businesses make it difficult to determine and collect the correct tax.
4. Poor administration and taxpayer resistance. Weak machinery for assessment and collection, a low tax culture, and public resentment (especially where taxes seem high or benefits are not seen) make collection difficult. (Other valid points: high cost of collection and inaccurate population/income data.)