January 26, 2022


Accounting + Finance Blog

Tax policy: Meaning and Explanations

Tax policy: Meaning and Explanations

A tax system is a combination of tax policy, tax laws, principles, and administration. Tax policy is an important aspect of taxation in any country. Aside from having tax laws, policies are set up for effective and efficient administration. The latest tax policy in Nigeria is the Finance Act of 2020.

What’s the tax policy?

Tax policy is a general statement of intention which guides the thinking and action of all concerned toward the realization of the set goal. (ICAN study pack, 2019)

It can also be defined as a statement set up by the government to pursue tax revenue that will meet the current goal or budget of the country.

Key Explanations

It is a statement of intention. Most tax intentions are to collect taxes from citizens in a cost-effective manner. The intention may also include shifting the tax burden from the poor to the wealthy citizens. And to ensure that the procedure for collecting taxes is easy for taxpayers.

It guides the thinking and actions of the parties involved. Tax policy must guide the thinking and actions of all parties. The parties include the government, taxpayers, and tax administrators. The governments include the Federal government, legislators, and judiciary.

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The statement guides the intentions and actions of all parties. If the government plans to change the rate of a particular tax, it relies on its tax policy to guide such changes.

It is meant to achieve set goals. The goal of a government is to earn revenue. That is, used to meet the welfare of its citizens as well as the administration of government. Good tax policy will, therefore, state ways in which a government can increase revenue from taxes.

According to the ICAN study pack, tax policy usually includes the following:

A shift from income tax to a consumption tax is less prone to tax invasions.

A tax regime that focuses on reducing the individual tax burden, widening the tax net, and encourages savings and investments. And

The use of self-assessment of tax and a movement from a coercive tax system to a voluntary tax system.

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Tax policy sets out how all tax parties are involved in the process of taxation. Therefore, government taxes should be easy to administer and will not pose more burden to taxpayers.