The system of taxation in Nigeria recognizes the following classification of tax. Taxes can be direct or indirect, they can be progressive, proportional, or regressive, and indirect taxes can be specific or ad-valorem. Outlined below are the meanings of these classifications of taxes.
Direct and Indirect Taxes:
The distinction between direct and indirect taxes is based on whether or not the burden of a tax can be shifted wholly or partly to others. If a tax is such that its burden cannot be shifted to others and the person who pays it to the Government has also to bear it, it is called a direct tax. Income tax, annual wealth tax, and capital gains tax are examples of direct taxes. In the case of a direct tax, there is direct contact between the taxpayer and tax-levying public authority.
On the other hand, indirect taxes are those whose burden can be shifted to others so that those who pay these taxes to the Government do not bear the whole burden but pass it on wholly or partly to others. For instance, excise duty on the production of sugar is an indirect tax because the manufacturers of sugar include the excise duty in the price and pass it on to buyers. Ultimately, it is the consumers on whom the incidence of excise duty on sugar falls as they will pay a higher price for sugar than before the imposition of the tax.
Thus, though excise duties are on the production of commodities, they can be shifted to the consumers. Likewise, sales tax on commodities can also be passed on to buyers or consumers in the form of higher prices charged for the commodities.
Therefore, excise duties and sales taxes on commodities are examples of indirect taxes. They are also known as commodity taxes. In the case of indirect taxes, there is an indirect relationship, between the Government and those who ultimately bear the burden of the taxes.
Specific and Ad-Valorem Taxes:
Indirect taxes can be either specific or ad-valorem. A specific tax on a commodity is a tax per unit of the commodity, whatever its price. Thus, the amount of total specific tax will vary in accordance with the changes in total output or sales of the commodity and not with the total value of output or sales.
On the other hand, an ad-valorem type of indirect tax is levied according to the value of the commodity. Ad-valorem taxes are progressive in their burden on consumers whereas specific taxes are regressive.
Progressive, Proportional, and Regressive Taxes
According to another classification, taxes can be progressive, proportional, or regressive. In the case of proportional tax, the same rate of the tax is charged, whatever the magnitude of the base on which it is levied. For instance, if the rate of income tax is 25 percent whatever the size of the income of a person, it will then be a proportional income tax. Likewise, if the rate of wealth tax is 5 percent, it will be proportional to wealth tax.
Thus, in the case of proportional tax, it is the rate that is fixed and not the absolute amount of the tax. Thus, with the rate of 25 percent proportional income tax, a person with an income of ₦ 25,000 will pay ₦ 6,250 as the tax, and a person with an income of ₦ 50,000 will pay ₦ 12,500 as the tax. Thus, even under proportional income tax, a richer person has to pay a greater amount of tax though the rate of the tax is the same.
On the other hand, in the case of a progressive tax, the rate of the tax increases as the amount of the tax base (income, wealth, or any other object) increases. The principle underlying a progressive tax is that the greater the tax base, the higher the tax rate.