January 29, 2022


Accounting + Finance Blog

Meaning of Tax Rate and Key Explanations

Meaning of Tax Rate and Key Explanations

It is a must for citizens either individuals or corporations to pay taxes as stipulated by the laws. The taxes paid are on the tax base and rate of the taxpayer. The amount paid is what is referred to as tax yield or returns. In previous articles, the above terms have been explained except tax rate. This article, therefore, focuses attention on the meaning and explanations of the aforementioned.

Meaning of Tax Rate

It is defined as the burden ratio expressed as percentage that is charged on the tax base on individuals and corporate tax payers. In addition, it is the percentage of the amount to be charged on individuals and legal persons’ incomes.

Key Explanations

The burden ratio. The percentage can either be progressive, regressive or proportion. It is progressive if the rate increases as the income increases. Regressive ratio is the opposite of progressive. Here, as the income increases the ratio decreases. Proportional or flat rate is a single rate charged irrespective of the tax base.

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It is charged on income. In most cases, the percentage is on the income of the citizen. This consists of personal income and company earnings. In Nigeria progressive ratio is applied to personal income tax. Other types of taxes use a flat rate. Company income uses 35 percent, value added 7%, among others.

Regressive tax rate is rarely used. This is because it goes against the principle of equality. Regressive allows tax to be charged on low income earners and less tax on wealthy people. But, progressive ensures that the rich citizens pay more taxes to the government. Moreover, the proportional rate charged the same tax rate irrespective of the level of income. Still, more income will mean more tax paid.

In Nigeria, as earlier mentioned, personal income tax (PIT) relies solely on progressive tax. People receiving a salary of 30,000 Naira and below are exempted from tax payment. The tax base for salaries above N30,000 will pay 7 percent for the first N30,000. The higher the income, the more tax to pay. After 7% of 30,000 Naira has been charged and there is more income to be taxed, the next burden ratio to use is 11% on 300,000. It goes on to any excess of 3,200,000. Which is charged 24%.

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Tax rates are a burden percentage on citizens that are capable of paying taxes. The rate is charged on income of individuals and corporate entities. It is in the form of progressive, regressive and proportional percentages. The progressive ratio is more equitable than others. And it is used on PIT. Other types of taxes uses proportional tax rates in Nigeria.