definition of a tax what is a tax? an enforced contribution exacted pursuant to legislative...
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Definition of a tax
What is a tax?An enforced contribution exacted pursuant to legislative authority in the exercise of the taxing power and imposed and collected for the purpose of raising revenue to be used for public or governmental purpose.
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According to the definitionTax cover the following characteristics:
1- the payment to the governmental authority by law.
2- the payment is required pursuant to the legislative power to tax.
3- the purpose of requiring the payment is to provide revenue to be used for public or governmental purpose.
4- special benefits and services or privileges are not received as a result of making the payment.
The payment is not a fine or penalty that imposed under the powers of government.
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Standards for evaluation tax
Equity . Certainly . Convenience . Economy
Equity:A tax should be based on the taxpayers ability to pay.The payment of a tax in proportion to the taxpayers
level of income results in equitable distribution of the cost of supporting the government.
Certainty:A taxpayer should know when and how a tax is to be
paid. And determine the amount of tax to be paid.If not, the taxpayer can ignore the payment ??
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Standards for evaluation tax
Convenience:
A tax should be levied at the time it is most likely suitable for the taxpayer to make the payment (when receive income) and have the money available to pay the tax.
Economy:
A tax should have minimum compliance and administrative costs. To maximize revenue for government.*
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Types of the US (federal) taxes
• Income taxes
• Employment taxes
• Social security taxes
• Unemployment taxes
• Sales taxes (VAT)
• Property taxes
• Excise taxes
• Wealth transfer taxes
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Local taxes
Direct taxes (no ability to be avoided)
1- income taxes
2- property taxes
Indirect taxes (can be avoided in some cases)
1- excise taxes
2- sales taxes (the same with VAT 14.5%)
3- customs
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VAT case for financial institutionThe total salaries for the Islamic bank = 40000$ and the net profit end year = 250000$ after vat
for salariesRequired:1- calculate the vat must be paid by the bank
monthly and at the end of year.2- calculate income tax assuming income tax
rate = 15%. And vat = 16%
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AnswerAnswer
1- vat paid monthly = 40000* 16% = 6400Vat for salaries end year = 6400* 12= 76800
2- vat for net profit = 250000* 16% = 40000Vat for the year = 76800+40000= 116800- Net profit after vat for profit = 250000- 40000=
210000- Income tax = 210000*15%= 31500
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Case for the relationship between VAT and PROFITCase for the relationship between VAT and PROFIT
Najeeb company LTD started trading without bookkeeping but all transaction with tax invoices entered to the statement of purchases and sales.
When examine the calculation we know that :1- total amount paid to VAT government office during the year
= 56002- no ending inventory 3- total amount of fixed assets purchased which entered to
statement of purchase and sale = 11600 and the depreciation rate 6%.
4- the base value for delayed purchase invoices for the next year =5000
5- during the current year paid the following expenses:15000 salaries. 300 interest. 200 others.
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Required:Calculate the accrued income tax if income tax rate
=15%. And VAT rate 16%.
Notes:- The base value of delayed purchase invoices due
to current year but did not entered to statement.- Invoices of purchasing the fixed assets have been
entered to the statement of the year and that mean deducted. But these purchasing due several years.
- So depreciation for one year should be deducted, That means we should add the base value of purchasing fixed assets to the profit value.
- Expenses which did not pay VAT did not enter the statement and did not deducted. So we must deduct it.
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answeranswerThe profit from the VAT statement=Payment * 100/165600 *100/16= 35000
Add the base value of purchasing the fixed assets= 11600/1.16= 10000Vat for fixed assets= 10000*16/100= 1600 to make sure of Vat
Deduct the base value of purchase invoices delayed to next year (5000)
Net profit before expenses not pay VAT 16% =40000
Deduct expenses not pay VAT as follow:
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- Salaries (15000)- Interest (300)- Others (200)- Depreciation of fixed assets 10000*6%=(600)- Total of expenses 16100
Net profit = (40000- 16100) =23900Income tax = 23900* 15%= 3585
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The relationship between VAT and other indirect taxesThe relationship between VAT and other indirect taxes
The most important step in calculation taxes by the following arrangement:
1- customs
2- the purchase tax (sales)
3 value added tax
The following case show the details.
A company will import raw material for trading with price 4000 and the customs 20% and purchase tax 60% and the vat 16%.
Required: calculate the price after taxes.
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answeranswer
Statement Value TaxesThe price 4000
Customs 4000*20% 800 800
Price after customs 4800
Purchase tax
4800*60%
2880 2880
Price after purchase tax 7680
VAT
7680* 16%
1229 1229
Price after VAT 8909
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Calculation of importing several goodsCalculation of importing several goods
Merchandise Cost Customs Added rate
Purchase tax
VAT Value after taxes
Soap 10000 13.6% 50% 10% 17%
Cars 90000 7% - 75% 17%
Milk 5000 75% 17%
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Merchandise Cost Customs Added rate
Purchase tax
VAT Value after taxes
Soap 10000 13.6% 50% 10% 17% 21930
Cars 90000 7% - 75% 17% 197174
Milk 5000 75% 17% 10238
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The difference between VAT and customsThe difference between VAT and customs
Standard VAT Custom & purchase tax
1 When imposed With all steps of production. sale. distribution
Imposed once when enter the goods for local area
2 Mechanism of collection
Collect from consumer then paid to government
First paid to government then collect from consumer
3 Tax classification Consider balance sheet account
Part of good cost (trading account) or income statement
4 Tax rate 14.5% It is according to good classification and & economic agreements and political situation
5 The ability of facing problems
difficult in applying Easy
6 Evasion Easy (Paris agreement) Difficult or no way
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incomeincome
Income defined
(includes income from all resources)
Minus: excluded income
Equals: gross income
Minus: deduction and exemptions
Equals: taxable income
* tax rate (from tax law)
Equals: income tax
Minus: tax prepayments
Tax credit
Equals: tax (refund) due with return
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casecase
Omar work in private company with monthly salary 2000 NIS. Calculate the income tax if you know that he is married and has 2 sons under 18 years old.
Note: The exchange rate for dollar 4 NIS.
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Answer:
Annual income = 2000*12= 24000
24000/4 = 6000$
Exemptions
Resident 3000
Wife 500
Sons 1000=500*2
Total =4500
Taxable income =1500* 8% 120$ annually
Tax value per month = 120$/ 12 =10$
10$*4 = 40 NIS
Salary after income tax= 1960 NIS
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casecase
Hassan work in private company with monthly salary 3000 NIS.
He lives in a rent home 200$ monthly.
He is married and have 5 sons.
Required:
Calculate the accrued income tax if you know that the exchange rate for dollar 4 NIS.
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Answer:
Annual income = 3000*12/4= 9000$
Exemptions
Resident 3000
Wife 500
Sons 2500=500*5
Rent 2000
Total of exemptions =(8000)
Taxable income =1000* 8% 80$ annually
Tax value per month = 80$/ 12 =6.66$
6.66$*4 = 26.6 NIS
Salary after income tax= 2973.4 NIS
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casecase
Mr. Marwan work as manager for a company with monthly salary 9000 NIS and have bonus addition career 1500 and bonus addition high cost of living 750 and bonus addition for travel 250
Required: calculate the income tax if you know that he is married and have 2 sons.
One of them study via Islamic university
the exchange rate for dollar 5 NIS Note: Marwan work in private company so bonus for travel included with income tax
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Answer:
Base salary 9000
Bonus addition career 1500
bonus addition high cost of living 750
bonus addition for travel 250
Total salary 11500 *12/5= 27600$
Exemption:
Resident 3000
Wife 500
Sons 500= 500*1
Student (university) 2500
Total of exemption = 6500$
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Taxable income 27600- 6500= 21100$10000*8%= 8006000*12%=7205100*16%= 816Annual income tax = 800+720+816=2336Monthly income tax= 2336/12=194.6$194.6*5=973 NISSalary after income tax = 11500-973=10527 NIS
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casecaseMr. Jehad work in the Investment Bank with monthly base
salary 309$ and bonus addition high cost of living amounted 80% of base salary. and bonus addition for cash risk 25.7$ monthly.
If you know that his contribution of saving box with 5% of base salary. And social security contribution (pension) 32.02$. Mr. Jehad get 14 salaries yearly (banking system)
Required: calculate the income tax in case
1- single.
2- (married + 4) and gets additional income from part time work 200$ for 6 months annually.
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Answer: case 1
Base salary 309$
+ addition high cost of living 247.2$ (309*80%)
+ addition for cash risk 25.7$
total monthly salary = 581.9$
Deduct nontaxable income
- saving box 15.45$
- social security contribution (pension) 32.02$
Total of nontaxable income = 47.47
Net income = 534.43
Annual net income =534.43*14= 7482.02$
Deduct the exemption
Resident 3000
Net taxable income 4482.02*8% = 358.56$
Monthly income tax 358.56 / 12 = 29.88$
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Answer: case 2
Base salary 309$
+ addition high cost of living 247.2$ (309*80%)
+ addition for cash risk 25.7$
total monthly salary = 581.9$
Deduct nontaxable income
- saving box 15.45$
- social security contribution (pension) 32.02$
Total of nontaxable income = 47.47
Net income = 534.43
Annual net income =534.43*14= 7482.02$ + ( 200$*6)=8682.02
Deduct the exemption
Resident 3000
Wife 500
Sons 2000 (500*4)
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Net taxable income 3182.02*8% = 254.56$
Monthly income tax 254.56 / 12 = 21.21$