January 26, 2022

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Meaning of Tax Base and Key Explanations

meaning of tax base and key explanations
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Taxes are charged by the government to earn revenue. To be effective several tax laws and administrations are organized by the said government. But for these to work out, it is based on tax concepts. There are several basic concepts of tax. This article will look at the tax base.

Meaning of tax base

It is the portion of income, assets, properties, consumptions, transactions and any other activities that are taxable (or suffer tax) by a tax authority under the government of a country.

It can, as well, be defined as the part of individuals and corporate wealth on which tax rates are applied by the tax authorities representing the government of the country.

Key Explanations

It is a portion. It is generally a portion of whatever is available for taxes. To arrive at the it certain expenses and statutory deductions must be subtracted from the income, profits, gains, and so on of the individuals and corporate bodies before it can be taxed by the relevant tax authority.

For example, in company income tax, depreciation is not a deduction. Instead, the taxpayer is expected to compute for capital expenditure using rates provided in the tax laws. The capital expenditure that is deducted with other statutory benefits and deductions to arrive at the tax base.

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It is based on wealth. It is based on the wealth of an individual or a corporation. This can be the portion of a person’s income such as wages and salaries, profits from personal businesses, gains from the sale of properties. Also, it is from the part of a company’s profits and gains from sales of assets.

It is more than just about a portion of income, profits and gains from individuals and corporate bodies. It may arise from consumption such as value-added tax, stamp duty, excise taxes and more.

Tax rates are applied. It is on the tax base tax rates are charged. To know the tax liability or the tax due by an individual or corporation, the tax rate is calculated on it. In formula, tax liabilities = tax base × tax rate.

For instance, if the tax base after adding and subtracting all statutory allowance and deduction of Mr Sunday is 2 million Naira for the year. And the tax rate that applies is 25 percent. Then, the tax to be paid by him shall be 2,000,000 × 25%. This gives 500,000 Naira. In this example, the tax base is 2 Million Naira, the rate is 25% and the tax liabilities is 500,000.

The tax authority assessed it. It is from the tax base the relevant tax authority assessed the tax liabilities. Individual and corporate bodies are allowed to compute their tax returns and remits the same to the tax authority. From time to time, the relevant tax administration has the right to examine the individuals or corporation to know if it has complied with relevant tax laws in its computation of tax liabilities.

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What else to know about tax base

The formula for calculating the tax base is tax liability ÷ tax rate. In the above example, if the tax base is unknown, we simply divide the tax liability of 500,000 by the tax rate of 25% (or 0.25). That is 500,000 ÷ 0.25. This gives you 2 million Naira.

It can be used as a basis to assessed of a country’s total tax liabilities. We can get the total base of tax for a country’s economy and multiple it by the tax rate. It can also be done by sectors. Or by the type of tax.

To expand, the banking sector total tax base can be assessed. Furthermore, the value-added for all VATable goods and services can be used to calculate the total VAT returns.

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Also, assessment can be by jurisdictions. Each state’s relevant tax authority can compute its tax revenue from the total tax base from individuals and businesses.

Conclusion

In the bottom line tax base is a concept in taxation. It can only be calculated from taxable incomes of individuals, corporate entities, consumptions and other economic activities that are taxable in a country.

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