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excise or excise tax (sometimes called a duty of excise or a special tax) may be defined broadly as an inland tax on the production for sale; or sale, of specific goods,[1] or narrowly as a tax on a good produced for sale, or sold, within the country. Excises are distinguished from customs duties, which are taxes on importation. Excises, whether broadly defined or narrowly defined, are inland taxes, whereas customs duties are border taxes. An excise is an indirect tax, meaning that the producer or seller who pays the tax to the government is expected to try to recover the tax by raising the price paid by the buyer (that is, to shift or pass on the tax). Excises are typically imposed in addition to another indirect tax such as a sales tax or VAT. In common terminology (but not necessarily in law) an excise is distinguished from a sales tax or VAT in three ways: (i) an excise typically applies to a narrower range of products; (ii) an excise is typically heavier, accounting for higher fractions (sometimes half or more) of the retail prices of the targeted products; and (iii) an excise is typically specific (so much per unit of measure; e.g. so many cents per gallon), whereas a sales tax or VAT is ad valorem, i.e. proportional to value (a percentage of the price in the case of a sales tax, or of value added in the case of a VAT). Typical examples of excise duties are taxes on gasoline and other fuels, and taxes on tobacco and alcohol (sometimes referred to as sin tax) Excise tax is notable for the vagueness of its definition. According to the New Oxford English Dictionary (Revised 2nd Ed., 2005), an excise is "a tax levied on certain goods and commodities produced or sold within a country and on licenses granted for certain activities" (emphasis added). The formula "produced or sold" is applicable to both domestic and foreign products. But the word "certain" is not further explained in the definition — or even in the etymology, according to which the word excise is derived from the Dutch accijns, which is presumed to come from the Latin accensare, meaning simply "to tax". It would be impossible to give a general formula predicting which goods are subject to excise. Lists of such goods are readily provided by governments, and from each list one may be able to infer the motives for grouping such goods together; however, no explicit formula appears to be provided by any one government. For example:
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In India, it is described as an indirect tax levied and collected on the goods manufactured in India. In the United Kingdom, HM Revenue and Customs lists "alcohol, environmental taxes, gambling, holdings & movements, hydrocarbon oil, money laundering, refunds of duty, revenue trader's records, tobacco duty, and visiting forces" as being subject to excise,[2] but offers no explanation of what these items have in common, apart from being excisable. Some of the listed items are not even goods, but rather services. The Australian Taxation Office describes an excise as "a tax levied on certain types of goods produced or manufactured in Australia. These... include alcohol, tobacco and petroleum and alternative fuels" (emphasis added).[3] What the Office calls an "excise" on locally produced goods is typically matched by what it calls a "customs duty" on comparable imported goods. But there is no general formula indicating which goods are subject to the duties in question.

In Australia, where the Constitution stipulates that only the Federal Parliament may impose duties of excise, the meaning of "excise" is not merely academic, but has been the subject of numerous court cases. Notwithstanding the terminology preferred by the Taxation Office, the High Court of Australia has repeatedly held that a tax can be an "excise" regardless of whether the taxed goods are of domestic or foreign origin; most recently, in Ha v New South Wales (1997), the majority of the Court endorsed the view that an excise is "an inland tax on a step in production, manufacture, sale or distribution of goods", and took a wide view of the kind of "step" which, if subject to a tax, would make the tax an excise. The fact that an "excise" need not discriminate between local and imported goods seems to imply that duties levied by Australian States on sales


of livestock and registrations of new vehicles are duties of excise,[4] while the wide view of the taxable "step" seems to imply that even the payroll taxes levied by the States are excises.[5] Whatever the merits or demerits of such arguments, it is clear that the constitutional meaning of "excise" is wider than the everyday meaning. Contents
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1 Purpose 2 Targets of taxation o 2.1 Drugs o 2.2 Gambling o 2.3 Prostitution o 2.4 Salt, paper, and windows 3 Examples by country o 3.1 Canada o 3.2 United States o 3.3 United Kingdom 4 Machinery of implementation 5 Criticisms o 5.1 Drugs 6 See also 7 References

[edit] Purpose In defence of excises on strong drink, Adam Smith wrote: "It has for some time past been the policy of Great Britain to discourage the consumption of spirituous liquors, on account of their supposed tendency to ruin the health and to corrupt the morals of the common people."[6] Samuel Johnson was less flattering in his 1755 dictionary: "EXCI'SE. n.s. ... A hateful tax levied upon commodities, and adjudged not by the common judges of property, but wretches hired by those to whom excise is paid."[7] Deducing from the types of goods, services and areas listed as excisable by many governments, and considering the thinkers' comments, a logical conclusion might be that excise duty was originally invented for some or all of the following reasons:

to protect people – o from harming their health by abusing substances such as tobacco and alcohol, thus making excise a kind of sumptuary tax o from harming themselves and others indirectly and morally by engaging in activities such as gambling and prostitution (see below) (including solicitation and pimping) – thus making it a type of vice tax or sin tax o from harming those around them and the general environment, both from overuse of the above-mentioned substances, and including curbing activities contributing to pollution (hence the tax on hydrocarbon oil and of other environmental taxes, as in the UK), or from harming the natural environment (hence the tax on hunting) - thus also making excise a kind of pigovian tax to provide monies needed – o for the extra healthcare and other public expenditures which will be needed as a direct or indirect result of excisable activities, such as lung cancer from smoking or road accidents resulting from drunk driving o for defense - including taxation directly levied on other countries' militaries and/or governments, such as the UK's taxation on "visiting forces"


This latter area can go wrong if unwisely implemented: a demonstrative situation arose in 2006 around central London's congestion charge (which, although not strictly branded as an excise tax, is a sort of environmental tax, as part of its aim is to reduce pollution in busy central London), where several foreign embassies got in a heated exchange with Greater London Authority for refusing to pay the charge arguing that, as diplomatic entities, they were exempt from paying it.

to punish – many US states impose taxes on drugs, and the UK government imposes excise on money laundering and on "visiting forces" (which can, from a legal standpoint, also be interpreted as "invading forces"). These are included in the statute books not because the government expects smugglers, launderers and invaders to pay for the right to conduct their harmful and illegal activities, but so that greater punishments and reparations/war reparations - based mainly around tax evasion - can be imposed in the case that the perpetrator is caught and tried.

[edit] Targets of taxation [edit] Drugs As already mentioned, many US states tax drugs, partly in order to be able to impose heavier punishments, as the Kansas Department of Revenue states on its website: "The fact that dealing marijuana and controlled substances is illegal does not exempt it from taxation. Therefore drug dealers are required by law to purchase drug tax stamps."[8] There are at least two major criticisms of such legislation, however - see below. [edit] Gambling Gambling licences are subject to excise in many countries; however, gambling itself was for a time also subject to taxation, in the form of stamp duty, whereby a revenue stamp had to be placed on the ace of spades in every pack of cards to demonstrate that the duty had been paid (hence the elaborate designs that evolved on this card in many packs as a result). Since stamp duty was originally only meant to be applied to documents (and cards were categorized as such), the fact that dice were also subject to stamp duty (and were in fact the only non-paper item listed under the 1765 Stamp Act) suggests that its implementation to cards and dice can be viewed as a type of excise duty on gambling.[9] [edit] Prostitution Prostitution has been proposed to bear excise tax in separate bills in the Canadian Parliament (2005), and in the Nevada Legislature (2009) - proposed wordings:
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"5.5 Implementation of a excise tax on prostitution, the brothel is taxed and passed it on." (Canada)[10] "An excise tax is hereby imposed on each patron who uses the prostitution services of a prostitute in the amount of $5 for each calendar day or portion thereof that the patron uses the prostitution services of that prostitute." (Nevada)[11]

The reasons given by Canadian MPs entering the bill covered many of the above-mentioned areas, including extra funding for police protection and better healthcare for the prostitutes - however, so did many of the counterarguments.[12]


[edit] Salt, paper, and windows Excise (often under different names, especially before the 15th century, usually consisting of several separate laws, each referring to the individual item being taxed) has been known to be applied to substances which would in today's world seem rather unusual, such as salt, paper, and coffee. In fact, salt was taxed as early as the second century,[13] and as late as the twentieth.[14] Many different reasons have been given for the taxation of such substances, but have usually - if not explicitly - revolved around the scarcity and high value of the substance, with governments clearly feeling entitled to a share of the profits traders make on these expensive items. Such would the justification of salt tax, paper excise, and even advertisement duty have been.[15] Window tax was slightly different, being brought in as a kind of alternative to income tax. [edit] Examples by country [edit] Canada Main article: Taxation in Canada#Excise taxes Both the federal and provincial governments impose excise taxes on inelastic goods such as cigarettes, gasoline, alcohol, and for vehicle air conditioners. A great bulk of the retail price of cigarettes and alcohol are excise taxes. The vehicle air conditioner tax is currently set at $100 per air conditioning unit. Canada has some of the highest rates of taxes on cigarettes and alcohol in the world. These are sometimes referred to as sin taxes. [edit] United States Main article: Excise tax in the United States An excise is "a tax upon manufacture, sale or for a business license or charter," according to's Legal Dictionary, and is to be distinguished from a tax on real property, income or estates." In the United States, the term "excise" means: (A) any tax other than a property tax or capitation (i.e., an indirect tax, or excise, in the constitutional law sense), or (B) a tax that is simply called an excise in the language of the statute imposing that tax (an excise in the statutory law sense, sometimes called a "miscellaneous excise"). An excise under definition (A) is not necessarily the same as an excise under definition (B), but the reverse is false.[citation needed] Both the federal and state governments levy excise taxes on goods such as alcohol, motor fuel, and tobacco products. Even though federal excise taxes are geographically uniform, state excise taxes vary considerably. However, taxation constitutes a substantial proportion of the retail prices on alcohol and tobacco products. Local governments may also impose an excise tax. For example, the city of Anchorage, Alaska charges a cigarette tax of $1.30 per pack, which is on top of the federal excise tax and the state excise tax. [edit] United Kingdom Main article: Her Majesty's Customs and Excise Her Majesty's Customs and Excise (HMCE) was, until April 2005, a department of the British Government in the UK. It was responsible for the collection of Value added tax (VAT), Customs Duties, Excise Duties, and


other indirect taxes such as Air Passenger Duty, Climate Change Levy, Insurance Premium Tax, Landfill Tax and Aggregates Levy. It was also responsible for managing the import and export of goods and services into the UK. HMCE was merged with the Inland Revenue (which was responsible for the administration and collection of direct taxes) to form a new department, HM Revenue and Customs, with effect from 18 April 2003. The tax was first implemented in the UK under this name in the mid-17th century. [edit] Machinery of implementation In many countries, excise duty is applied by the affixation of revenue stamps to the products being sold. In the case of tobacco or alcohol, for example, the producer buys a certain bulk amount of excise stamps from the government and is then obliged to affix one to every packet of cigarettes or bottle of spirits produced.

[edit] Criticisms Critics of excise tax - such as Samuel Johnson, above - have interpreted and described excise duty as simply a government's way of levying further and unnecessary taxation on the population. The presence of "refunds of duty" under the UK's list of excisable activities has been used to support this argument, as it results in taxation being implemented on persons even where they would normally be exempt from paying other types of taxes – hence why they are getting the refund in the first place. Furthermore, excise is often somewhat similar to other taxes and sometimes doubles up with them, as in the above example, or as in the case of customs duties: since the two taxes largely apply to the same types of goods, people are forced to pay tax twice over on the same items (except in the case of duty-free) - once through excise upon purchase and a second time around through customs duties upon transportation. (A justification for this is that the country the items are being entered into is applying the customs partly for the same reasons as the original excise was charged, as it is the country of import which will suffer the ill environmental, health and social effects of, say, the cigarettes and alcohol being brought in; thus customs has many similar pros and cons as has excise.) [edit] Drugs There are at least two major criticisms of excise legislation on drugs •

One is that, while it acts as a deterrent, it is also been argued that the state in question is able to gain revenues, while the legislation protects the anonymity of the dealers - as in the example of Kansas: "A dealer is not required to give his/her name or address when purchasing stamps and the Department is prohibited from sharing any information relating to the purchase of drug tax stamps with law enforcement or anyone else." [8]

The other criticism is that as far as legal drugs are concerned (i.e. medicines and pharmaceuticals) – these are also subject to taxation in some countries, notably India. This has raised controversy about the fact that this tax leads to hugely inflated prices of ordinary and even potentially lifesaving medication.[citation needed]


Understanding and Using Letters of Credit, Part I Letters of credit accomplish their purpose by substituting the credit of the bank for that of the customer, for the purpose of facilitating trade. There are basically two types: commercial and standby. The commercial letter of credit is the primary payment mechanism for a transaction, whereas the standby letter of credit is a secondary payment mechanism. Commercial Letter of Credit Commercial letters of credit have been used for centuries to facilitate payment in international trade. Their use will continue to increase as the global economy evolves. Letters of credit used in international transactions are governed by the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits. The general provisions and definitions of the International Chamber of Commerce are binding on all parties. Domestic collections in the United States are governed by the Uniform Commercial Code. A commercial letter of credit is a contractual agreement between a bank, known as the issuing bank, on behalf of one of its customers, authorizing another bank, known as the advising or confirming bank, to make payment to the beneficiary. The issuing bank, on the request of its customer, opens the letter of credit. The issuing bank makes a commitment to honor drawings made under the credit. The beneficiary is normally the provider of goods and/or services. Essentially, the issuing bank replaces the bank's customer as the payee. Elements of a Letter of Credit
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A payment undertaking given by a bank (issuing bank) On behalf of a buyer (applicant) To pay a seller (beneficiary) for a given amount of money On presentation of specified documents representing the supply of goods Within specified time limits Documents must conform to terms and conditions set out in the letter of credit Documents to be presented at a specified place

Beneficiary The beneficiary is entitled to payment as long as he can provide the documentary evidence required by the letter of credit. The letter of credit is a distinct and separate transaction from the contract on which it is based. All parties deal in documents and not in goods. The issuing bank is not liable for performance of the underlying contract between the customer and beneficiary. The issuing bank's obligation to the buyer, is to examine all documents to insure that they meet all the terms and conditions of the credit. Upon requesting demand for payment the beneficiary warrants that all conditions of the agreement have been complied with. If the beneficiary (seller) conforms to the letter of credit, the seller must be paid by the bank. Issuing Bank The issuing bank's liability to pay and to be reimbursed from its customer becomes absolute upon the completion of the terms and conditions of the letter of credit. Under the provisions of the Uniform Customs and Practice for Documentary Credits, the bank is given a reasonable amount of time after receipt of the documents to honor the draft. The issuing banks' role is to provide a guarantee to the seller that if compliant documents are presented, the bank will pay the seller the amount due and to examine the documents, and only pay if these documents comply with the terms and conditions set out in the letter of credit.


Typically the documents requested will include a commercial invoice, a transport document such as a bill of lading or airway bill and an insurance document; but there are many others. Letters of credit deal in documents, not goods. Advising Bank An advising bank, usually a foreign correspondent bank of the issuing bank will advise the beneficiary. Generally, the beneficiary would want to use a local bank to insure that the letter of credit is valid. In addition, the advising bank would be responsible for sending the documents to the issuing bank. The advising bank has no other obligation under the letter of credit. If the issuing bank does not pay the beneficiary, the advising bank is not obligated to pay. Confirming Bank The correspondent bank may confirm the letter of credit for the beneficiary. At the request of the issuing bank, the correspondent obligates itself to insure payment under the letter of credit. The confirming bank would not confirm the credit until it evaluated the country and bank where the letter of credit originates. The confirming bank is usually the advising bank. Letter of Credit Characteristics Negotiability Letters of credit are usually negotiable. The issuing bank is obligated to pay not only the beneficiary, but also any bank nominated by the beneficiary. Negotiable instruments are passed freely from one party to another almost in the same way as money. To be negotiable, the letter of credit must include an unconditional promise to pay, on demand or at a definite time. The nominated bank becomes a holder in due course. As a holder in due course, the holder takes the letter of credit for value, in good faith, without notice of any claims against it. A holder in due course is treated favorably under the UCC. The transaction is considered a straight negotiation if the issuing bank's payment obligation extends only to the beneficiary of the credit. If a letter of credit is a straight negotiation it is referenced on its face by "we engage with you" or "available with ourselves". Under these conditions the promise does not pass to a purchaser of the draft as a holder in due course. Revocability Letters of credit may be either revocable or irrevocable. A revocable letter of credit may be revoked or modified for any reason, at any time by the issuing bank without notification. A revocable letter of credit cannot be confirmed. If a correspondent bank is engaged in a transaction that involves a revocable letter of credit, it serves as the advising bank. Once the documents have been presented and meet the terms and conditions in the letter of credit, and the draft is honored, the letter of credit cannot be revoked. The revocable letter of credit is not a commonly used instrument. It is generally used to provide guidelines for shipment. If a letter of credit is revocable it would be referenced on its face. The irrevocable letter of credit may not be revoked or amended without the agreement of the issuing bank, the confirming bank, and the beneficiary. An irrevocable letter of credit from the issuing bank insures the beneficiary that if the required documents are presented and the terms and conditions are complied with, payment will be made. If a letter of credit is irrevocable it is referenced on its face. Transfer and Assignment The beneficiary has the right to transfer or assign the right to draw, under a credit only when the credit states that it is transferable or assignable. Credits governed by the Uniform Commercial Code (Domestic) maybe transferred an unlimited number of times. Under the Uniform Customs Practice for Documentary Credits (International) the credit may be transferred only once. However, even if the credit specifies that it is


nontransferable or nonassignable, the beneficiary may transfer their rights prior to performance of conditions of the credit. Sight and Time Drafts All letters of credit require the beneficiary to present a draft and specified documents in order to receive payment. A draft is a written order by which the party creating it, orders another party to pay money to a third party. A draft is also called a bill of exchange. There are two types of drafts: sight and time. A sight draft is payable as soon as it is presented for payment. The bank is allowed a reasonable time to review the documents before making payment. A time draft is not payable until the lapse of a particular time period stated on the draft. The bank is required to accept the draft as soon as the documents comply with credit terms. The issuing bank has a reasonable time to examine those documents. The issuing bank is obligated to accept drafts and pay them at maturity. Standby Letter of Credit The standby letter of credit serves a different function than the commercial letter of credit. The commercial letter of credit is the primary payment mechanism for a transaction. The standby letter of credit serves as a secondary payment mechanism. A bank will issue a standby letter of credit on behalf of a customer to provide assurances of his ability to perform under the terms of a contract between the beneficiary. The parties involved with the transaction do not expect that the letter of credit will ever be drawn upon. The standby letter of credit assures the beneficiary of the performance of the customer's obligation. The beneficiary is able to draw under the credit by presenting a draft, copies of invoices, with evidence that the customer has not performed its obligation. The bank is obligated to make payment if the documents presented comply with the terms of the letter of credit. Standby letters of credit are issued by banks to stand behind monetary obligations, to insure the refund of advance payment, to support performance and bid obligations, and to insure the completion of a sales contract. The credit has an expiration date. The standby letter of credit is often used to guarantee performance or to strengthen the credit worthiness of a customer. In the above example, the letter of credit is issued by the bank and held by the supplier. The customer is provided open account terms. If payments are made in accordance with the suppliers' terms, the letter of credit would not be drawn on. The seller pursues the customer for payment directly. If the customer is unable to pay, the seller presents a draft and copies of invoices to the bank for payment. The domestic standby letter of credit is governed by the Uniform Commercial Code. Under these provisions, the bank is given until the close of the third banking day after receipt of the documents to honor the draft. Procedures for Using the Tool The following procedures include a flow of events that follow the decision to use a Commercial Letter of Credit. Procedures required to execute a Standby Letter of Credit are less rigorous. The standby credit is a domestic transaction. It does not require a correspondent bank (advising or confirming). The documentation requirements are also less tedious. Step-by-step process:
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Buyer and seller agree to conduct business. The seller wants a letter of credit to guarantee payment. Buyer applies to his bank for a letter of credit in favor of the seller. Buyer's bank approves the credit risk of the buyer, issues and forwards the credit to its correspondent bank (advising or confirming). The correspondent bank is usually located in the same geographical location as the seller (beneficiary).


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Advising bank will authenticate the credit and forward the original credit to the seller (beneficiary). Seller (beneficiary) ships the goods, then verifies and develops the documentary requirements to support the letter of credit. Documentary requirements may vary greatly depending on the perceived risk involved in dealing with a particular company. Seller presents the required documents to the advising or confirming bank to be processed for payment. Advising or confirming bank examines the documents for compliance with the terms and conditions of the letter of credit. If the documents are correct, the advising or confirming bank will claim the funds by: o Debiting the account of the issuing bank. o Waiting until the issuing bank remits, after receiving the documents. o Reimburse on another bank as required in the credit. Advising or confirming bank will forward the documents to the issuing bank. Issuing bank will examine the documents for compliance. If they are in order, the issuing bank will debit the buyer's account. Issuing bank then forwards the documents to the buyer.

Standard Forms of Documentation When making payment for product on behalf of its customer, the issuing bank must verify that all documents and drafts conform precisely to the terms and conditions of the letter of credit. Although the credit can require an array of documents, the most common documents that must accompany the draft include: Commercial Invoice The billing for the goods and services. It includes a description of merchandise, price, FOB origin, and name and address of buyer and seller. The buyer and seller information must correspond exactly to the description in the letter of credit. Unless the letter of credit specifically states otherwise, a generic description of the merchandise is usually acceptable in the other accompanying documents. Bill of Lading A document evidencing the receipt of goods for shipment and issued by a freight carrier engaged in the business of forwarding or transporting goods. The documents evidence control of goods. They also serve as a receipt for the merchandise shipped and as evidence of the carrier's obligation to transport the goods to their proper destination. Warranty of Title A warranty given by a seller to a buyer of goods that states that the title being conveyed is good and that the transfer is rightful. This is a method of certifying clear title to product transfer. It is generally issued to the purchaser and issuing bank expressing an agreement to indemnify and hold both parties harmless. Letter of Indemnity Specifically indemnifies the purchaser against a certain stated circumstance. Indemnification is generally used to guaranty that shipping documents will be provided in good order when available. Common Defects in Documentation About half of all drawings presented contain discrepancies. A discrepancy is an irregularity in the documents that causes them to be in non-compliance to the letter of credit. Requirements set forth in the letter of credit cannot be waived or altered by the issuing bank without the express consent of the customer. The beneficiary should prepare and examine all documents carefully before presentation to the paying bank to avoid any delay in receipt of payment. Commonly found discrepancies between the letter of credit and supporting documents include:
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Letter of Credit has expired prior to presentation of draft. Bill of Lading evidences delivery prior to or after the date range stated in the credit.


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Stale dated documents. Changes included in the invoice not authorized in the credit. Inconsistent description of goods. Insurance document errors. Invoice amount not equal to draft amount. Ports of loading and destination not as specified in the credit. Description of merchandise is not as stated in credit. A document required by the credit is not presented. Documents are inconsistent as to general information such as volume, quality, etc. Names of documents not exact as described in the credit. Beneficiary information must be exact. Invoice or statement is not signed as stipulated in the letter of credit.

When a discrepancy is detected by the negotiating bank, a correction to the document may be allowed if it can be done quickly while remaining in the control of the bank. If time is not a factor, the exporter should request that the negotiating bank return the documents for corrections. If there is not enough time to make corrections, the exporter should request that the negotiating bank send the documents to the issuing bank on an approval basis or notify the issuing bank by wire, outline the discrepancies, and request authority to pay. Payment cannot be made until all parties have agreed to jointly waive the discrepancy. Tips for Exporters
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Communicate with your customers in detail before they apply for letters of credit. Consider whether a confirmed letter of credit is needed. Ask for a copy of the application to be fax to you, so you can check for terms or conditions that may cause you problems in compliance. Upon first advice of the letter of credit, check that all its terms and conditions can be complied with within the prescribed time limits. Many presentations of documents run into problems with time-limits. You must be aware of at least three time constraints - the expiration date of the credit, the latest shipping date and the maximum time allowed between dispatch and presentation. If the letter of credit calls for documents supplied by third parties, make reasonable allowance for the time this may take to complete. After dispatch of the goods, check all the documents both against the terms of the credit and against each other for internal consistency.

Summary The use of the letters of credit as a tool to reduce risk has grown substantially over the past decade. Letters of credit accomplish their purpose by substituting the credit of the bank for that of the customer, for the purpose of facilitating trade. The credit professional should be familiar with two types of letters of credit: commercial and standby. Commercial letters of credit are used primarily to facilitate foreign trade. The commercial letter of credit is the primary payment mechanism for a transaction. The standby letter of credit serves a different function. The standby letter of credit serves as a secondary payment mechanism. The bank will issue the credit on behalf of a customer to provide assurances of his ability to perform under the terms of a contract. Upon receipt of the letter of credit, the credit professional should review all items carefully to insure that what is expected of the seller is fully understood and that he can comply with all the terms and conditions. When compliance is in question, the buyer should be requested to amend the credit.


Negotiable instrument From Wikipedia, the free encyclopedia Jump to: navigation, search A negotiable instrument is a document contemplated by a contract, warranting (1) the payment of money, the promise of or order for conveyance of which is unconditional; and, (2) which specifies or describes the payee, who is designated on and memorialized by the instrument and which is capable of change through transfer by valid negotiation of the instrument. As payment of money is promised subsequently, the instrument itself can be used by the holder in due course as a store of value; although, instruments can be transferred for amounts in contractual exchange that are less than the instrument’s face value (known as “discounting”). Common examples include promissory notes, cheques, and banknotes. Under United States law, Article 3 of the Uniform Commercial Code as enacted in the applicable State law governs the use of negotiable instruments, except banknotes (“Federal Reserve Notes”). Contents
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1 Negotiable instruments distinguished from contracts o 1.1 The holder in due course 2 Classes o 2.1 Promissory note o 2.2 Bill of exchange 3 In the Commonwealth 4 In the United States o 4.1 Negotiation and indorsement o 4.2 Usage o 4.3 Exceptions 5 See also 6 References 7 External links

[edit] Negotiable instruments distinguished from contracts A negotiable instrument can serve to convey value constituting at least part of the performance of a contract, albeit perhaps not obvious in contract formation, in terms inherent in and arising from the requisite offer and acceptance and conveyance of consideration. The underlying contract contemplates the right to hold the instrument as, and to negotiate the instrument to, a holder in due course, the payment on which is at least part of the performance of the contract to which the negotiable instrument is linked. The instrument, memorializing (1) the power to demand payment; and, (2) the right to be paid, can move, for example, in the instance of a 'bearer instrument', wherein the possession of the document itself attributes and ascribes the right to payment. Certain exceptions exist, such as instances of loss or theft of the instrument, wherein the possessor of the note may be a holder, but not necessarily a holder in due course. Negotiation requires a valid endorsement of the negotiable instrument. The consideration constituted by a negotiable instrument is cognizable as the value given up to acquire it (benefit) and the consequent loss of value (detriment) to the prior holder; thus, no separate consideration is required to support an accompanying contract assignment. The instrument itself is understood as memorializing the right for, and power to demand, payment, and an obligation for payment evidenced by the instrument itself with possession as a holder in due course being the touchstone for the right to, and power to demand, payment. In some instances, the negotiable instrument can serve as the writing memorializing a contract, thus satisfying any applicable Statute of Frauds as to that contract.


[edit] The holder in due course The rights of a holder in due course of a negotiable instrument are qualitatively, as matters of law, superior to those provided by ordinary species of contracts:

The rights to payment are not subject to set-off, and do not rely on the validity of the underlying contract giving rise to the debt (for example if a cheque was drawn for payment for goods delivered but defective, the drawer is still liable on the cheque) No notice need be given to any party liable on the instrument for transfer of the rights under the instrument by negotiation. However, payment by the party liable to the person previously entitled to enforce the instrument "counts" as payment on the note until adequate notice has been received by the liable party that a different party is to receive payments from then on. [U.C.C. §3-602(b)] Transfer free of equities—the holder in due course can hold better title than the party he obtains it from (as in the instance of negotiation of the instrument from a mere holder to a holder in due course)

Negotiation often enables the transferee to become the party to the contract through a contract assignment (provided for explicitly or by operation of law) and to enforce the contract in the transferee-assignee’s own name. Negotiation can be effected by indorsement and delivery (order instruments), or by delivery alone (bearer instruments). In addition, the rights and obligations accruing to the transferee can be affected by the rule of derivative title, which does not allow a property owner to transfer rights in a piece of property greater than his own. [edit] Classes Promissory notes and bills of exchange are two primary types of negotiable instruments. [edit] Promissory note A negotiable promissory note is unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand to the payee, or at fixed or determinable future time, sum certain in money, to order or to bearer. (see Sec.194) Bank note is frequently referred to as a promissory note, a promissory note made by a bank and payable to bearer on demand. [edit] Bill of exchange A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the payee. A common type of bill of exchange is the cheque (check in American English), defined as a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were a common means of exchange. They are not used as often today. Bill of exchange, 1933 A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer. (Sec.126) It is essentially an order made by one person to another to pay money to a third person. A bill of exchange requires in its inception three parties—the drawer, the drawee, and the payee.


The person who draws the bill is called the drawer. He gives the order to pay money to third party. The party upon whom the bill is drawn is called the drawee. He is the person to whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he indicates his willingness to pay the bill. (Sec.62) The party in whose favor the bill is drawn or is payable is called the payee. The parties need not all be distinct persons. Thus, the drawer may draw on himself payable to his own order. (see Sec. 8) A bill of exchange may be endorsed by the payee in favour of a third party, who may in turn endorse it to a fourth, and so on indefinitely. The "holder in due course" may claim the amount of the bill against the drawee and all previous endorsers, regardless of any counterclaims that may have disabled the previous payee or endorser from doing so. This is what is meant by saying that a bill is negotiable. In some cases a bill is marked "not negotiable" – see crossing of cheques. In that case it can still be transferred to a third party, but the third party can have no better right than the transferor. [edit] In the Commonwealth In the commonwealth almost all jurisdictions have codified the law relating to negotiable instruments in a Bills of Exchange Act, e.g. Bills of Exchange Act 1882 in the UK, Bills of Exchange Act 1908 in New Zealand, The Negotiable Instrument Act 1881 in India and The Bills of Exchange Act 1914 in Mauritius. The Bills of Exchange Act: 1. defines a bill of exchange as: 'an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person, or to bearer. 2. defines a cheque as: 'a bill of exchange drawn on a banker payable on demand' 3. defines a promissory note as: 'an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person or to bearer.' Additionally most commonwealth jurisdictions have separate Cheques Acts providing for additional protections for bankers collecting unindorsed or irregularly indorsed cheques, providing that cheques that are crossed and marked 'not negotiable' or similar are not transferrable, and providing for electronic presentation of cheques in inter-bank cheque clearing systems. The 1911 Encyclopædia Britannica Eleventh Edition has a comprehensive article on the Bill of Exchange, detailing its history and operation, as understood at the time of its publication. [edit] In the United States In the United States, Article 3 and Article 4 of the Uniform Commercial Code govern the issuance and transfer of negotiable instruments. The various State law enactments of Uniform Commercial Code §§3104(a) through (d) set forth the legal definition of what is and what is not a negotiable instrument: “ § 3-104. NEGOTIABLE INSTRUMENT. (a) Except as provided in subsections (c) and (d), "negotiable instrument" means an unconditional promise or order to pay a fixed amount of money, with or without interest or other


charges described in the promise or order, if it: (1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder; (2) is payable on demand or at a definite time; and (3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor. (b) "Instrument" means a negotiable instrument. (c) An order that meets all of the requirements of subsection (a), except paragraph (1), and otherwise falls within the definition of "check" in subsection (f) is a negotiable instrument and a check. (d) A promise or order other than a check is not an instrument if, at the time it is issued or first comes into possession of a holder, it contains a conspicuous statement, however expressed, to the effect that the promise or order is not negotiable or is not an instrument governed by this Article. Thus, for a writing to be a negotiable instrument under Article 3,[1] the following requirements must be met: 1. 2. 3. 4. The promise or order to pay must be unconditional; The payment must be a specific sum of money, although interest may be added to the sum; The payment must be made on demand or at a definite time; The instrument must not require the person promising payment to perform any act other than paying the money specified; 5. The instrument must be payable to bearer or to order.

The latter requirement is referred to as the "words of negotiability": a writing which does not contain the words "to the order of" (within the four corners of the instrument or in indorsement on the note or in allonge) or indicate that it is payable to the individual holding the contract document (analogous to the holder in due course) is not a negotiable instrument and is not governed by Article 3, even if it appears to have all of the other features of negotiability. The only exception is that if an instrument meets the definition of a cheque (a bill of exchange payable on demand and drawn on a bank) and is not payable to order (i.e. if it just reads "pay John Doe") then it is treated as a negotiable instrument. [edit] Negotiation and indorsement Persons other than the original obligor and obligee can become parties to a negotiable instrument. The most common manner in which this is done is by placing one's signature on the instrument (“indorsement”): if the person who signs does so with the intention of obtaining payment of the instrument or acquiring or


transferring rights to the instrument, the signature is called an indorsement. There are five types of indorsements contemplated by the Code, covered in UCC Article 3, Sections 204–206:
• • • •

An indorsement which purports to transfer the instrument to a specified person is a special indorsement; An indorsement by the payee or holder which does not contain any additional notation (thus puporting to make the instrument payable to bearer) is an indorsement in blank or blank endorsement; An indorsement which purports to require that the funds be applied in a certain manner (e.g. "for deposit only", "for collection") is a restrictive indorsement; and, An indorsement purporting to disclaim retroactive liability is called a qualified indorsement (through the inscription of the words "without recourse" as part of the indorsement on the instrument or in allonge to the instrument). An indorsement purporting to add terms and conditions is called a conditional endorsement – for example, "Pay to the order of Amy, if she rakes my lawn next Thursday November 11th, 2007". The UCC states that these conditions may be disregarded.[2]

If a note or draft is negotiated to a person who acquires the instrument 1. in good faith; 2. for value; 3. without notice of any defenses to payment, the transferee is a holder in due course and can enforce the instrument without being subject to defenses which the maker of the instrument would be able to assert against the original payee, except for certain real defenses. These real defenses include (1) forgery of the instrument; (2) fraud as to the nature of the instrument being signed; (3) alteration of the instrument; (4) incapacity of the signer to contract; (5) infancy of the signer; (6) duress; (7) discharge in bankruptcy; and, (8) the running of a statute of limitations as to the validity of the instrument. The holder-in-due-course rule is a rebuttable presumption that makes the free transfer of negotiable instruments feasible in the modern economy. A person or entity purchasing an instrument in the ordinary course of business can reasonably expect that it will be paid when presented to, and not subject to dishonor by, the maker, without involving itself in a dispute between the maker and the person to whom the instrument was first issued (this can be contrasted to the lesser rights and obligations accruing to mere holders). Article 3 of the Uniform Commercial Code as enacted in a particular State's law contemplate real defenses available to purported holders in due course. The foregoing is the theory and application presuming compliance with the relevant law. Practically, the obligor-payor on an instrument who feels he has been defrauded or otherwise unfairly dealt with by the payee may nonetheless refuse to pay even a holder in due course, requiring the latter to resort to litigation to recover on the instrument. [edit] Usage While bearer instruments are rarely created as such, a holder of commercial paper with the holder designated as payee can change the instrument to a bearer instrument by an endorsement. The proper holder simply signs the back of the instrument and the instrument becomes bearer paper, although in recent years, third party checks are not being honored by most banks unless the original payee has signed a notarized document stating such. Alternately, an individual or company may write a check payable to "Cash" or "Bearer" and create a bearer instrument. Great care should be taken with the security of the instrument, as it is legally almost as good as cash.


[edit] Exceptions Under the Code, the following are not negotiable instruments, although the law governing obligations with respect to such items may be similar to or derived from the law applicable to negotiable instruments:
• • • • •

Bills of lading and other documents of title, which are governed by Article 7 of the Code Deeds and other documents conveying interests in real estate, although a mortgage may secure a promissory note which is governed by Article 3 IOUs Letters of credit, which are governed by Article 5 of the Code Securities, such as stocks and bonds, which are governed by Article 8 of the Code


To tax (from the Latin taxo; "I estimate") is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities. Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent (often but not always unpaid labour). A tax may be defined as a "pecuniary burden laid upon individuals or property owners to support the government […] a payment exacted by legislative authority."[1] A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government […] whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name."[1] The legal definition and the economic definition of taxes differ in that economists do not consider many transfers to governments to be taxes. For example, some transfers to the public sector are comparable to prices. Examples include tuition at public universities and fees for utilities provided by local governments. Governments also obtain resources by creating money (e.g., printing bills and minting coins), through voluntary gifts (e.g., contributions to public universities and museums),by imposing penalties (e.g., traffic fines), by borrowing, and by confiscating wealth. From the view of economists, a tax is a non-penal, yet compulsory transfer of resources from the private to the public sector levied on a basis of predetermined criteria and without reference to specific benefit received. In modern taxation systems, taxes are levied in money, but in-kind and corvée taxation are characteristic of traditional or pre-capitalist states and their functional equivalents. The method of taxation and the government expenditure of taxes raised is often highly debated in politics and economics. Tax collection is performed by a government agency such as Canada Revenue Agency, the Internal Revenue Service (IRS) in the United States, or Her Majesty's Revenue and Customs (HMRC) in the UK. When taxes are not fully paid, civil penalties (such as fines or forfeiture) or criminal penalties (such as incarceration)[2] may be imposed on the non-paying entity or individual. Contents

• •

1 Purposes and effects o 1.1 The Four "R"s o 1.2 Proportional, progressive, and regressive o 1.3 Direct and indirect o 1.4 Tax incidence 2 History o 2.1 Taxation levels o 2.2 Forms of taxation 3 Tax rates 4 Economics of taxation o 4.1 Deadweight costs of taxation o 4.2 Pigovian taxes o 4.3 Transparency and simplicity o 4.4 Tax incidence o 4.5 Costs of compliance 5 Kinds of taxes o 5.1 Ad valorem o 5.2 Bank tax o 5.3 Capital gains tax o 5.4 Consumption tax o 5.5 Corporate tax o 5.6 Currency transaction tax


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5.7 Environmental Tax 5.8 Excises 5.9 Expatriation Tax 5.10 Financial activities tax 5.11 Financial transaction tax 5.12 Income tax 5.13 Inflation tax 5.14 Inheritance tax 5.15 Poll tax 5.16 Property tax 5.17 Social security tax 5.18 Sales tax 5.19 Tariffs 5.20 Toll 5.21 Transfer tax 5.22 Value Added Tax / Goods and Services Tax 5.23 Wealth (net worth) tax 6 Views on taxation o 6.1 Ethical basis of taxation o 6.2 Optimal taxation theory o 6.3 Views opposed to taxation o 6.4 Effects of income taxation on division of labor 7 By country or region 8 See also 9 Notes 10 External links
o o o o o o o o o o o o o o o o o

[edit] Purposes and effects Money provided by taxation have been used by states and their functional equivalents throughout history to carry out many functions. Some of these include expenditures on war, the enforcement of law and public order, protection of property, economic infrastructure (roads, legal tender, enforcement of contracts, etc.), public works, social engineering, and the operation of government itself. Governments also use taxes to fund welfare and public services. These services can include education systems, health care systems, pensions for the elderly, unemployment benefits, and public transportation. Energy, water and waste management systems are also common public utilities. Colonial and modernizing states have also used cash taxes to draw or force reluctant subsistence producers into cash economies. Governments use different kinds of taxes and vary the tax rates. This is done to distribute the tax burden among individuals or classes of the population involved in taxable activities, such as business, or to redistribute resources between individuals or classes in the population. Historically, the nobility were supported by taxes on the poor; modern social security systems are intended to support the poor, the disabled, or the retired by taxes on those who are still working. In addition, taxes are applied to fund foreign aid and military ventures, to influence the macroeconomic performance of the economy (the government's strategy for doing this is called its fiscal policy - see also tax exemption), or to modify patterns of consumption or employment within an economy, by making some classes of transaction more or less attractive. A nation's tax system is often a reflection of its communal values or/and the values of those in power. To create a system of taxation, a nation must make choices regarding the distribution of the tax burden—who will pay taxes and how much they will pay—and how the taxes collected will be spent. In democratic nations where the public elects those in charge of establishing the tax system, these choices reflect the type of community that the public and/or government wishes to create. In countries where the public does not have a


significant amount of influence over the system of taxation, that system may be more of a reflection on the values of those in power. The resource collected from the public through taxation is always greater than the amount which can be used by the government. The difference is called compliance cost, and includes for example the labour cost and other expenses incurred in complying with tax laws and rules. The collection of a tax in order to spend it on a specified purpose, for example collecting a tax on alcohol to pay directly for alcoholism rehabilitation centres, is called hypothecation. This practice is often disliked by finance ministers, since it reduces their freedom of action. Some economic theorists consider the concept to be intellectually dishonest since (in reality) money is fungible. Furthermore, it often happens that taxes or excises initially levied to fund some specific government programs are then later diverted to the government general fund. In some cases, such taxes are collected in fundamentally inefficient ways, for example highway tolls. Some economists, especially neo-classical economists, argue that all taxation creates market distortion and results in economic inefficiency. They have therefore sought to identify the kind of tax system that would minimize this distortion. Also, one of every government's most fundamental duties is to administer possession and use of land in the geographic area over which it is sovereign, and it is considered economically efficient for government to recover for public purposes the additional value it creates by providing this unique service. Since governments also resolve commercial disputes, especially in countries with common law, similar arguments are sometimes used to justify a sales tax or value added tax. Others (e.g. libertarians) argue that most or all forms of taxes are immoral due to their involuntary (and therefore eventually coercive/violent) nature. The most extreme anti-tax view is anarcho-capitalism, in which the provision of all social services should be voluntarily bought by the person(s) using them. [edit] The Four "R"s for verification. This section needs additional citations Please help improve this article by adding reliable references. Unsourced material may be challenged and removed. (January 2010)

Question book g

Taxation has four main purposes or effects: Revenue, Redistribution, Repricing, and Representation.[citation

The main purpose is revenue: taxes raise money to spend on armies, roads, schools and hospitals, and on more indirect government functions like market regulation or legal systems. A second is redistribution. Normally, this means transferring wealth from the richer sections of society to poorer sections. A third purpose of taxation is repricing. Taxes are levied to address externalities: tobacco is taxed, for example, to discourage smoking, and a carbon tax discourages use of carbon-based fuels. A fourth, consequential effect of taxation in its historical setting has been representation. The American revolutionary slogan "no taxation without representation" implied this: rulers tax citizens, and citizens demand accountability from their rulers as the other part of this bargain. Studies have shown that direct taxation (such as income taxes) generates the greatest degree of accountability and better governance, while indirect taxation tends to have smaller effects.[3][4] [edit] Proportional, progressive, and regressive


An important feature of tax systems is the percentage of the tax burden as it relates to income or consumption. The terms progressive, regressive, and proportional are used to describe the way the rate progresses from low to high, from high to low, or proportionally. The terms describe a distribution effect, which can be applied to any type of tax system (income or consumption) that meets the definition. A progressive tax is a tax imposed so that the effective tax rate increases as the amount to which the rate is applied increases. The opposite of a progressive tax is a regressive tax, where the effective tax rate decreases as the amount to which the rate is applied increases. In between is a proportional tax, where the effective tax rate is fixed, while the amount to which the rate is applied increases. The terms can also be used to apply meaning to the taxation of select consumption, such as a tax on luxury goods and the exemption of basic necessities may be described as having progressive effects as it increases a tax burden on high end consumption and decreases a tax burden on low end consumption.[5][6][7] [edit] Direct and indirect Main articles: Direct tax and Indirect tax Taxes are sometimes referred to as direct taxes or indirect taxes. The meaning of these terms can vary in different contexts, which can sometimes lead to confusion. An economic definition, by Atkinson, states that " taxes may be adjusted to the individual characteristics of the taxpayer, whereas indirect taxes are levied on transactions irrespective of the circumstances of buyer or seller." (A. B. Atkinson, Optimal Taxation and the Direct Versus Indirect Tax Controversy, 10 Can. J. Econ. 590, 592 (1977)). According to this definition, for example, income tax is "direct", and sales tax is "indirect". In law, the terms may have different meanings. In U.S. constitutional law, for instance, direct taxes refer to poll taxes and property taxes, which are based on simple existence or ownership. Indirect taxes are imposed on events, rights, privileges, and activities. Thus, a tax on the sale of property would be considered an indirect tax, whereas the tax on simply owning the property itself would be a direct tax. The distinction between direct and indirect taxation can be subtle, but can be important under the law. [edit] Tax incidence Diagram illustrating taxes effect Law establishes from whom a tax is collected. In many countries, taxes are imposed on business (such as corporate taxes or portions of payroll taxes). However, who ultimately pays the tax (the tax "burden") is determined by the marketplace as taxes become embedded into production costs. Depending on how quantities supplied and demanded vary with price (the "elasticities" of supply and demand), a tax can be absorbed by the seller (in the form of lower pre-tax prices), or by the buyer (in the form of higher post-tax prices). If the elasticity of supply is low, more of the tax will be paid by the supplier. If the elasticity of demand is low, more will be paid by the customer. And contrariwise for the cases where those elasticities are high. If the seller is a competitive firm, the tax burden flows back to the factors of production depending on the elasticities thereof; this includes workers (in the form of lower wages), capital investors (in the form of loss to shareholders), landowners (in the form of lower rents) and entrepreneurs (in the form of lower wages of superintendence). To illustrate this relationship, suppose the market price of a product is $1.00, and that a $0.50 tax is imposed on the product that, by law, is to be collected from the seller. If the product has an elastic demand, a greater portion of the tax will be absorbed by the seller. This is because goods with elastic demand cause a large decline in quantity demanded for a small increase in price. Therefore in order to stabilise sales, the seller absorbs more of the additional tax burden. For example, the seller might drop the price of the product to $0.70 so that, after adding in the tax, the buyer pays a total of $1.20, or $0.20 more than he did before the $0.50 tax was imposed. In this example, the buyer has paid $0.20 of the $0.50 tax (in the form of a post-tax price) and the seller has paid the remaining $0.30 (in the form of a lower pre-tax price).[8]


[edit] History [edit] Taxation levels Egyptian peasants seized for non-payment of taxes. (Pyramid Age) The first known system of taxation was in Ancient Egypt around 3000 BC - 2800 BC in the first dynasty of the Old Kingdom.[9] Records from the time document that the pharaoh would conduct a biennial tour of the kingdom, collecting tax revenues from the people. Other records are granary receipts on limestone flakes and papyrus.[10] Early taxation is also described in the Bible. In Genesis (chapter 47, verse 24 - the New International Version), it states "But when the crop comes in, give a fifth of it to Pharaoh. The other fourfifths you may keep as seed for the fields and as food for yourselves and your households and your children." Joseph was telling the people of Egypt how to divide their crop, providing a portion to the Pharaoh. A share (20%) of the crop was the tax. Later, in the Persian Empire, a regulated and sustainable tax system was introduced by Darius I the Great in 500 BC;[11] the Persian system of taxation was tailored to each Satrapy (the area ruled by a Satrap or provincial governor). At differing times there were between 20 and 30 Satrapies in the Empire and each was assessed according to its supposed productivity. It was the responsibility of the Satrap to collect the due amount and to send it to the emperor, after deducting his expenses (The expenses and the power of deciding precisely how and from whom to raise the money in the province, offer maximum opportunity for rich pickings.) The quantities demanded from the various provinces gave a vivid picture of their economic potential. For instance, Babylon was assessed for the highest amount and for a startling mixture of commodities - 1000 silver talents, four months supply of food for the army. India clearly, was already fabled for its gold; the province was to supply gold dust equal in value to the very large amount of 4680 silver talents. Egypt was known for the wealth of its crops; it was to be the granary of the Persian Empire (as later of Rome's) and was required to provide 120,000 measures of grain in addition to 700 talents of silver. This was exclusively a tax levied on subject peoples. Persians and Medes paid no tax, but, they were liable at any time to serve in the army.[12] In India, Islamic rulers imposed jizya (a poll tax on non-Muslims) starting in the 11th century. It was abolished by Akbar. Quite a few records of government tax collection in Europe since at least the 17th century are still available today. But taxation levels are hard to compare to the size and flow of the economy since production numbers are not as readily available. Government expenditures and revenue in France during the 17th century went from about 24.30 million livres in 1600-10 to about 126.86 million livres in 1650-59 to about 117.99 million livres in 1700-10 when government debt had reached 1.6 billion livres. In 1780-89 it reached 421.50 million livres.[13] Taxation as a percentage of production of final goods may have reached 15% - 20% during the 17th century in places like France, the Netherlands, and Scandinavia. During the war-filled years of the eighteenth and early nineteenth century, tax rates in Europe increased dramatically as war became more expensive and governments became more centralized and adept at gathering taxes. This increase was greatest in England, Peter Mathias and Patrick O'Brien found that the tax burden increased by 85% over this period. Another study confirmed this number, finding that per capita tax revenues had grown almost sixfold over the eighteenth century, but that steady economic growth had made the real burden on each individual only double over this period before the industrial revolution. Average tax rates were higher in Britain than France the years before the French Revolution, twice in per capita income comparison, but they were mostly placed on international trade. In France, taxes were lower but the burden was mainly on landowners, individuals, and internal trade and thus created far more resentment.[14]


Taxation as a percentage of GDP in 2003 was 56.1% in Denmark, 54.5% in France, 49.0% in the Euro area, 42.6% in the United Kingdom, 35.7% in the United States, 35.2% in Ireland, and among all OECD members an average of 40.7%.[15][16] [edit] Forms of taxation In monetary economies prior to fiat banking, a critical form of taxation was seigniorage, the tax on the creation of money. Other obsolete forms of taxation include:
• • •

• • • •

Scutage - paid in lieu of military service; strictly speaking a commutation of a non-tax obligation rather than a tax as such, but functioning as a tax in practice Tallage - a tax on feudal dependents Tithe - a tax-like payment (one tenth of one's earnings or agricultural produce), paid to the Church (and thus too specific to be a tax in strict technical terms). This should not be confused with the modern practice of the same name which is normally voluntary. Aids - During feudal times a feudal aid was a type of tax or due paid by a vassal to his lord. Danegeld - medieval land tax originally raised to pay off raiding Danes and later used to fund military expenditures. Carucage - tax which replaced the danegeld in England. Tax Farming - the principle of assigning the responsibility for tax revenue collection to private citizens or groups.

Some principalities taxed windows, doors, or cabinets to reduce consumption of imported glass and hardware. Armoires, hutches, and wardrobes were employed to evade taxes on doors and cabinets. In some circumstances, taxes are also used to enforce public policy like congestion charge (to cut road traffic and encourage public transport) in London. In Tsarist Russia, taxes were clamped on beards. Today, one of the most complicated taxation-systems worldwide is in Germany. Three quarters of the world's taxation-literature refers to the German system[citation needed]. There are 118 laws, 185 forms, and 96,000 regulations, spending €3.7 billion to collect the income tax. Today, governments of advanced economies of EU, North America, and others rely more on direct taxes, while those of developing economies of India, Africa, and others rely more on indirect taxes. [edit] Tax rates Main article: Tax rate Taxes are most often levied as a percentage, called the tax rate. An important distinction when talking about tax rates is to distinguish between the marginal rate and the effective (average) rate. The effective rate is the total tax paid divided by the total amount the tax is paid on, while the marginal rate is the rate paid on the next dollar of income earned. For example, if income is taxed on a formula of 5% from $0 up to $50,000, 10% from $50,000 to $100,000, and 15% over $100,000, a taxpayer with income of $175,000 would pay a total of $18,750 in taxes. Tax calculation (0.05*50,000) + (0.10*50,000) + (0.15*75,000) = 18,750 The "effective rate" would be 10.7%: 18,750/175,000 = 0.107 The "marginal rate" would be 15%.


[edit] Economics of taxation In economic terms, taxation transfers wealth from households or businesses to the government of a nation. The side-effects of taxation and theories about how best to tax are an important subject in microeconomics. Taxation is almost never a simple transfer of wealth. Economic theories of taxation approach the question of how to minimize the loss of economic welfare through taxation and also discuss how a nation can perform redistribution of wealth in the most efficient manner. [edit] Deadweight costs of taxation Taxes generally reduce economic efficiency by introducing a deadweight loss. In a competitive market, the price of a particular economic good adjusts to ensure that all trades which benefit both the buyer and the seller of a good occur. After introducing a tax, the price received by the seller is less than the cost to the buyer. This means that fewer trades occur and that the individuals or businesses involved gain less from participating in the market. This destroys value, and is known as the 'deadweight cost of taxation'. The deadweight cost is dependent on the elasticity of supply and demand for a good. Most taxes—including income tax and sales tax—can have significant deadweight costs. The only way to avoid deadweight costs in an economy which is generally competitive is to refrain from taxes which change economic incentives. Such taxes include the land value tax,[17] where the tax is on a good in completely inelastic supply, a lump sum tax such as a poll tax (head tax) which is paid by all adults regardless of their choices. Arguably a windfall profits tax which is entirely unanticipated can also fall into this category. [edit] Pigovian taxes The existence of a tax can increase economic efficiency in some cases. If there is a negative externality associated with a good, meaning that it has negative effects not felt by the consumer, then a free market will trade too much of that good. By taxing the good, the government can increase overall welfare as well as raising revenue. This type of tax is called a Pigovian tax, after economist Arthur Pigou. Possible Pigovian taxes include those on polluting fuels (like petrol), taxes on goods which incur public healthcare costs (such as alcohol or tobacco), and charges for existing 'free' public goods (like congestion charging) are another possibility. [edit] Transparency and simplicity Another concern is that the complicated tax codes of developed economies offer perverse economic incentives. The more details of tax policy there are, the more opportunities for legal tax avoidance and illegal tax evasion; these not only result in lost revenue, but involve additional deadweight costs: for instance, payments made for tax advice are essentially deadweight costs because they add no wealth to the economy. Perverse incentives also occur because of non-taxable 'hidden' transactions; for instance, a sale from one company to another might be liable for sales tax, but if the same goods were shipped from one branch of a corporation to another, no tax would be payable. To address these issues, economists often suggest simple and transparent tax structures which avoid providing loopholes. Sales tax, for instance, can be replaced with a value added tax which disregards intermediate transactions. [edit] Tax incidence Main article: Tax incidence


Economic theory suggests that the economic effect of tax does not necessarily fall at the point where it is legally levied. For instance, a tax on employment paid by employers will impact on the employee, at least in the long run. The greatest share of the tax burden tends to fall on the most inelastic factor involved - the part of the transaction which is affected least by a change in price. So, for instance, a tax on wages in a town will (at least in the long run) affect property-owners in that area. See also: Effect of taxes and subsidies on price [edit] Costs of compliance Although governments must spend money on tax collection activities, some of the costs, particularly for keeping records and filling out forms, are borne by businesses and by private individuals. These are collectively called costs of compliance. More complex tax systems tend to have higher costs of compliance. This fact can be used as the basis for practical or moral arguments in favor of tax simplification (see, for example, FairTax), or tax elimination. [edit] Kinds of taxes The Organisation for Economic Co-operation and Development (OECD) publishes perhaps the most comprehensive analysis of worldwide tax systems. In order to do this it has created a comprehensive categorisation of all taxes in all regimes which it covers.[18] [edit] Ad valorem Main article: Ad valorem An ad valorem tax is one where the tax base is the value of a good, service, or property. Sales taxes, tariffs, property taxes, inheritance taxes, and value added taxes are different types of ad valorem tax. An ad valorem tax is typically imposed at the time of a transaction (sales tax or value added tax (VAT)) but it may be imposed on an annual basis (property tax) or in connection with another significant event (inheritance tax or tariffs). An alternative to ad valorem taxation is an excise tax, where the tax base is the quantity of something, regardless of its price. [edit] Bank tax Main article: Bank tax A bank tax ("bank levy") is a proposed tax on banks. One of the earliest modern uses of the term "bank tax" occurred in the context of the Financial crisis of 2007–2010. [edit] Capital gains tax Main article: Capital gains tax A capital gains tax is the tax levied on the profit released upon the sale of a capital asset. In many cases, the amount of a capital gain is treated as income and subject to the marginal rate of income tax. However, in an inflationary environment, capital gains may be to some extent illusory: if prices in general have doubled in five years, then selling an asset for twice the price it was purchased for five years earlier represents no gain at all. Partly to compensate for such changes in the value of money over time, some jurisdictions, such as the United States, give a favorable capital gains tax rate based on the length of holding. European jurisdictions have a similar rate reduction to nil on certain property transactions that qualify for the participation exemption. In Canada, 50% of the gain is taxable income. In India, Short Term Capital Gains Tax (arising


before 1 year) is 10% flat rate of the gains and Long Term Capital Gains Tax is nil for stocks & mutual fund units held 1 year or more and 20% for any other assets held 3 years or more. If such a tax is levied on inherited property, it can act as a de facto probate or inheritance tax. [edit] Consumption tax Main article: Consumption tax A consumption tax is a tax on non-investment spending, and can be implemented by means of a sales tax or by modifying an income tax to allow for unlimited deductions for investment or savings. [edit] Corporate tax Main article: Corporate tax See also: Excess profits tax, Windfall profits tax, and Income tax Corporate tax refers to a taxes levied by various jurisdictions on the capital or profits of companies or associations and often includes capital gains of a company. Taxable profits are generally considered gross revenue less expenses and cost of property sold. Expenditures providing benefit over multiple periods are often deducted over the useful life of the resulting asset as depreciation or amortization. Accounting rules about deductible expenses and tax rules about deductible expense may differ, giving rise to book-tax differences. If the book-tax difference is carried over more than a year, it is referred to as a temporary difference, which then creates deferred tax assets and liabilities for the corporation, which are carried on the balance sheet. [edit] Currency transaction tax Main article: Currency transaction tax See also: Financial transaction tax, Stamp duty, and Transfer tax A currency transaction tax is a tax placed on a specific type of currency transaction. This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. There are several types of currency transaction taxes that have been proposed, the most prominent being the Tobin tax and the Spahn tax. Most remain unimplemented concepts. [edit] Environmental Tax See also: Ecotax, Gas Guzzler Tax, and Polluter pays principle This includes natural resources consumption tax, greenhouse gas tax (Carbon tax), "sulfuric tax", and others. The stated purpose is to reduce the environmental impact by repricing. [edit] Excises Main article: Excise Unlike an ad valorem, an excise is not a function of the value of the product being taxed. Excise taxes are based on the quantity, not the value, of product purchased. For example, in the United States, the Federal government imposes an excise tax of 18.4 cents per U.S. gallon (4.86¢/L) of gasoline, while state governments levy an additional 8 to 28 cents per U.S. gallon. Excises on particular commodities are frequently hypothecated. For example, a fuel excise (use tax) is often used to pay for public transportation, especially roads and bridges and for the protection of the environment. A special form of hypothecation arises


where an excise is used to compensate a party to a transaction for alleged uncontrollable abuse; for example, a blank media tax is a tax on recordable media such as CD-Rs, whose proceeds are typically allocated to copyright holders. Critics charge that such taxes blindly tax those who make legitimate and illegitimate usages of the products; for instance, a person or corporation using CD-R's for data archival should not have to subsidize the producers of popular music. Excises (or exemptions from them) are also used to modify consumption patterns (social engineering). For example, a high excise is used to discourage alcohol consumption, relative to other goods. This may be combined with hypothecation if the proceeds are then used to pay for the costs of treating illness caused by alcohol abuse. Similar taxes may exist on tobacco, pornography, etc., and they may be collectively referred to as "sin taxes". A carbon tax is a tax on the consumption of carbon-based non-renewable fuels, such as petrol, diesel-fuel, jet fuels, and natural gas. The object is to reduce the release of carbon into the atmosphere. In the United Kingdom, vehicle excise duty is an annual tax on vehicle ownership. [edit] Expatriation Tax Main article: Expatriation Tax An Expatriation Tax is a tax on some who renounce their citizenship of some governments. One example is the United States under the American Jobs Creation Act, where any individual who has a net worth of $2 million or an average income-tax liability of $127,000 who renounces his or her citizenship and leaves the country is automatically assumed to have done so for tax avoidance reasons and is subject to a higher tax rate.[19] [edit] Financial activities tax For a full explanation of the context in which this tax was proposed, see Bank tax. As a regulatory response and proposal to the financial crisis of 2007-2010, on April 16, 2010, the IMF proposed three types of global taxes on banks:[20] First, the "Financial Stability Contribution" is a straight tax on a bank's gross profits—before deducting compensation. It would initially be at a flat rate, this would eventually be refined so that riskier businesses paid more.[21] Second, the "Financial Activities Tax" aims directly at excess bank profit and pay.[22] The third, which was not endorsed by the IMF, but not ruled out as administratively difficult, is a financial transaction tax. [edit] Financial transaction tax Main article: Financial transaction tax A financial transaction tax is a tax placed on a specific type (or types) of financial transaction for a specific purpose (or purposes). This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. There are several types of financial transaction taxes, some of which remain unimplemented concepts. [edit] Income tax Main article: Income Tax An income tax is a tax levied on the financial income of persons, corporations, or other legal entities. Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate


tax, corporate income tax, or corporation tax. Individual income taxes often tax the total income of the individual (with some deductions permitted), while corporate income taxes often tax net income (the difference between gross receipts, expenses, and additional write-offs). The "tax net" refers to the types of payment that are taxed, which included personal earnings (wages), capital gains, and business income. The rates for different types of income may vary and some may not be taxed at all. Capital gains may be taxed when realized (e.g. when shares are sold) or when incurred (e.g. when shares appreciate in value). Business income may only be taxed if it is significant or based on the manner in which it is paid. Some types of income, such as interest on bank savings, may be considered as personal earnings (similar to wages) or as a realized property gain (similar to selling shares). In some tax systems, personal earnings may be strictly defined where labor, skill, or investment is required (e.g. wages); in others, they may be defined broadly to include windfalls (e.g. gambling wins). Personal income tax is often collected on a pay-as-you-earn basis, with small corrections made soon after the end of the tax year. These corrections take one of two forms: payments to the government, for taxpayers who have not paid enough during the tax year; and tax refunds from the government for those who have overpaid. Income tax systems will often have deductions available that lessen the total tax liability by reducing total taxable income. They may allow losses from one type of income to be counted against another. For example, a loss on the stock market may be deducted against taxes paid on wages. Other tax systems may isolate the loss, such that business losses can only be deducted against business tax by carrying forward the loss to later tax years. [edit] Inflation tax Main article: Inflation tax An inflation tax is the economic disadvantage suffered by holders of cash and cash equivalents in one denomination of currency due to the effects of expansionary monetary policy, which acts as a hidden tax that subtracts value from those assets. Many economists[who?] hold that the inflation tax affects the lower and middle classes more than the rich, as they hold a larger fraction of their income in cash, they are much less likely to receive the newly created monies before the market has adjusted with inflated prices, and more often have fixed incomes, wages or pensions. Some argue that inflation is a regressive consumption tax.[23] There are systemic effects of an expansionary monetary policy, which are also definitively taxing, imposing a financial charge on some as a result of the policy. Because the effects of monetary expansion or counterfeiting are never uniform over an entire economy, the policy influences capital transfers in the market, creating economic bubbles where the new monies are first introduced. Economic bubbles increase market instability, and therefore increase investment risk, creating the conditions common to a recession. This particular tax can be understood to be levied on future generations that would have benefited from economic growth, and it has a 100% transfer cost (so long as people are not acting against their interests, increased uncertainty benefits noone). One example of a strong supporter of this tax was the former Federal Reserve chair Beardsley Ruml. [edit] Inheritance tax Main article: Inheritance tax Inheritance tax, estate tax, and death tax or duty are the names given to various taxes which arise on the death of an individual. In United States tax law, there is a distinction between an estate tax and an inheritance tax: the former taxes the personal representatives of the deceased, while the latter taxes the beneficiaries of the estate. However, this distinction does not apply in other jurisdictions; for example, if using this terminology UK inheritance tax would be an estate tax. [edit] Poll tax


Main article: Poll tax A poll tax, also called a per capita tax, or capitation tax, is a tax that levies a set amount per individual. It is an example of the concept of fixed tax. One of the earliest taxes mentioned in the Bible of a half-shekel per annum from each adult Jew (Ex. 30:11-16) was a form of poll tax. Poll taxes are administratively cheap because they are easy to compute and collect and difficult to cheat. Economists have considered poll taxes economically efficient because people are presumed to be in fixed supply. However, poll taxes are very unpopular because poorer people pay a higher proportion of their income than richer people. In addition, the supply of people is in fact not fixed over time: on average, couples will choose to have fewer children if a poll tax is imposed.[24] The introduction of a poll tax in medieval England was the primary cause of the 1381 Peasants' Revolt. Scotland was the first to be used to test the new poll tax in 1989 with England and Wales in 1990. The change from a progressive local taxation based on property values to a single-rate form of taxation regardless of ability to pay (the Community Charge, but more popularly referred to as the Poll Tax), led to widespread refusal to pay and to incidents of civil unrest, known colloquially as the 'Poll Tax riots'. [edit] Property tax Main article: Property tax A property tax is a tax put on property by reason of its ownership. Property tax can be defined as "generally, tax imposed by municipalities upon owners of property within their jurisdiction based on the value of such property."[25] There are three species of property: land, improvements to land (immovable man-made things, e.g. buildings) and personal property (movable things). Real estate or realty is the combination of land and improvements to land. Property taxes are usually charged on a recurrent basis (e.g., yearly). A common type of property tax is an annual charge on the ownership of real estate, where the tax base is the estimated value of the property. For a period of over 150 years from 1695 a window tax was levied in England, with the result that one can still see listed buildings with windows bricked up in order to save their owners money. A similar tax on hearths existed in France and elsewhere, with similar results. The two most common type of event driven property taxes are stamp duty, charged upon change of ownership, and inheritance tax, which is imposed in many countries on the estates of the deceased. In contrast with a tax on real estate (land and buildings), a land value tax is levied only on the unimproved value of the land ("land" in this instance may mean either the economic term, i.e., all natural resources, or the natural resources associated with specific areas of the Earth's surface: "lots" or "land parcels"). Proponents of land value tax argue that it is economically justified, as it will not deter production, distort market mechanisms or otherwise create deadweight losses the way other taxes do.[26] When real estate is held by a higher government unit or some other entity not subject to taxation by the local government, the taxing authority may receive a payment in lieu of taxes to compensate it for some or all of the foregone tax revenue. In many jurisdictions (including many American states), there is a general tax levied periodically on residents who own personal property (personalty) within the jurisdiction. Vehicle and boat registration fees are subsets of this kind of tax. The tax is often designed with blanket coverage and large exceptions for things like food and clothing. Household goods are often exempt when kept or used within the household.[27] Any otherwise non-exempt object can lose its exemption if regularly kept outside the household.[27] Thus, tax collectors often monitor newspaper articles for stories about wealthy people who have lent art to museums for public display, because the artworks have then become subject to personal property tax.[27] If an artwork had to be sent to another state for some touch-ups, it may have become subject to personal property tax in that state as well.[27]


[edit] Social security tax Some countries with social security systems, which provide income to retired workers, fund those systems with specific dedicated taxes. These often differ from comprehensive income taxes in that they are levied only on specific sources of income, generally wages and salary (in which case they are called payroll taxes). A further difference is that the total amount of the taxes paid by or on behalf of a worker is typically considered in the calculation of the retirement benefits to which that worker is entitled. Examples of retirement taxes include the FICA tax, a payroll tax that is collected from employers and employees in the United States to fund the country's Social Security system; and the National Insurance Contributions (NICs) collected from employers and employees in the United Kingdom to fund the country's national insurance system. These taxes are sometimes regressive in their immediate effect. For example, in the United States, each worker, whatever his or her income, pays at the same rate up to a specified cap, but income over the cap is not taxed. The benefit payments are similarly disproportionate, replacing a higher percentage of a lower-paid worker's pre-retirement income. [edit] Sales tax Main article: Sales tax Sales taxes are levied when a commodity is sold to its final consumer. Retail organizations contend that such taxes discourage retail sales. The question of whether they are generally progressive or regressive is a subject of much current debate. People with higher incomes spend a lower proportion of them, so a flat-rate sales tax will tend to be regressive. It is therefore common to exempt food, utilities and other necessities from sales taxes, since poor people spend a higher proportion of their incomes on these commodities, so such exemptions make the tax more progressive. This is the classic "You pay for what you spend" tax, as only those who spend money on non-exempt (i.e. luxury) items pay the tax. A small number of U.S. states rely entirely on sales taxes for state revenue, as those states do not levy a state income tax. Such states tend to have a moderate to large amount of tourism or inter-state travel that occurs within their borders, allowing the state to benefit from taxes from people the state would otherwise not tax. In this way, the state is able to reduce the tax burden on its citizens. The U.S. states that do not levy a state income tax are Alaska, Tennessee, Florida, Nevada, South Dakota, Texas,[28] Washington state, and Wyoming. Additionally, New Hampshire and Tennessee levy state income taxes only on dividends and interest income. Of the above states, only Alaska and New Hampshire do not levy a state sales tax. Additional information can be obtained at the Federation of Tax Administrators website. In the United States, there is a growing movement[29] for the replacement of all federal payroll and income taxes (both corporate and personal) with a national retail sales tax and monthly tax rebate to households of citizens and legal resident aliens. The tax proposal is named FairTax. In Canada, the federal sales tax is called the Goods and Services tax (GST) and now stands at 5%. The provinces of British Columbia, Saskatchewan, Manitoba, Ontario and Prince Edward Island also have a provincial sales tax [PST]. The provinces of Nova Scotia, New Brunswick, and Newfoundland & Labrador have harmonized their provincial sales taxes with the GST - Harmonized Sales Tax [HST], and thus is a full VAT. The province of Quebec collects the Quebec Sales Tax [QST] which is based on the GST with certain differences. Most businesses can claim back the GST, HST and QST they pay, and so effectively it is the final consumer who pays the tax. [edit] Tariffs Main article: Tariff An import or export tariff (also called customs duty or impost) is a charge for the movement of goods through a political border. Tariffs discourage trade, and they may be used by governments to protect domestic


industries. A proportion of tariff revenues is often hypothecated to pay government to maintain a navy or border police. The classic ways of cheating a tariff are smuggling or declaring a false value of goods. Tax, tariff and trade rules in modern times are usually set together because of their common impact on industrial policy, investment policy, and agricultural policy. A trade bloc is a group of allied countries agreeing to minimize or eliminate tariffs against trade with each other, and possibly to impose protective tariffs on imports from outside the bloc. A customs union has a common external tariff, and the participating countries share the revenues from tariffs on goods entering the customs union. [edit] Toll A toll is a tax[dubious – discuss] or fee charged to travel via a road, bridge, tunnel, canal, waterway or other transportation facilities. Historically tolls have been used to pay for public bridge, road and tunnel projects. They have also been used in privately constructed transport links. The toll is likely to be a fixed charge, possibly graduated for vehicle type, or for distance on long routes. Shunpiking is the practice of finding another route to avoid payment of tolls. In some situations where tolls were increased or felt to be unreasonably high, informal shunpiking by individuals escalated into a form of boycott by regular users, with the goal of applying the financial stress of lost toll revenue to the authority determining the levy. [edit] Transfer tax Main article: Transfer tax Historically, in many countries, a contract needed to have a stamp affixed to make it valid. The charge for the stamp was either a fixed amount or a percentage of the value of the transaction. In most countries the stamp has been abolished but stamp duty remains. Stamp duty is levied in the UK on the purchase of shares and securities, the issue of bearer instruments, and certain partnership transactions. Its modern derivatives, stamp duty reserve tax and stamp duty land tax, are respectively charged on transactions involving securities and land. Stamp duty has the effect of discouraging speculative purchases of assets by decreasing liquidity. In the United States transfer tax is often charged by the state or local government and (in the case of real property transfers) can be tied to the recording of the deed or other transfer documents. [edit] Value Added Tax / Goods and Services Tax Main article: Value added tax A value added tax (VAT), also known as 'Goods and Services Tax' (G.S.T), Single Business Tax, or Turnover Tax in some countries, applies the equivalent of a sales tax to every operation that creates value. To give an example, sheet steel is imported by a machine manufacturer. That manufacturer will pay the VAT on the purchase price, remitting that amount to the government. The manufacturer will then transform the steel into a machine, selling the machine for a higher price to a wholesale distributor. The manufacturer will collect the VAT on the higher price, but will remit to the government only the excess related to the "value added" (the price over the cost of the sheet steel). The wholesale distributor will then continue the process, charging the retail distributor the VAT on the entire price to the retailer, but remitting only the amount related to the distribution mark-up to the government. The last VAT amount is paid by the eventual retail customer who cannot recover any of the previously paid VAT. For a VAT and sales tax of identical rates, the total tax paid is the same, but it is paid at differing points in the process. VAT is usually administrated by requiring the company to complete a VAT return, giving details of VAT it has been charged (referred to as input tax) and VAT it has charged to others (referred to as output tax). The difference between output tax and input tax is payable to the Local Tax Authority. If input tax is greater than output tax the company can claim back money from the Local Tax Authority.


[edit] Wealth (net worth) tax Main article: Wealth tax Some countries' governments will require declaration of the tax payers' balance sheet (assets and liabilities), and from that exact a tax on net worth (assets minus liabilities), as a percentage of the net worth, or a percentage of the net worth exceeding a certain level. The tax may be levied on "natural" or legal "persons". An example is France's ISF. [edit] Views on taxation

[edit] Ethical basis of taxation According to most political philosophies, taxes are justified as they fund activities that are necessary and beneficial to society. Additionally, progressive taxation can be used to reduce economic inequality in a society. According to this view, taxation in modern nation-states benefit the majority of the population and social development.[30] A common presentation of this view, paraphrasing various statements by Oliver Wendell Holmes, Jr. is "Taxes are the price of civilization".[31] It can also be argued that in a democracy, because the government is the party performing the act of imposing taxes, society as a whole decides how the tax system should be organized.[32] The American Revolution's "No taxation without representation" slogan implied this view. For traditional conservatives, the payment of taxation is justified as part of the general obligations of citizens to obey the law and support established institutions. The conservative position is encapsulated in perhaps the most famous adage of public finance, "An old tax is a good tax".[33] Conservatives advocate the "fundamental conservative premise that no one should be excused from paying for government, lest they come to believe that government is costless to them with the certain consequence that they will demand more government 'services'.".[34] Social democrats generally favor higher levels of taxation to fund public provision of a wide range of services such as universal health care and education, as well as the provision of a range of welfare benefits.[35] As argued by Tony Crosland and others, the capacity to tax income from capital is a central element of the social democratic case for a mixed economy as against Marxist arguments for comprehensive public ownership of capital. Many libertarians recommend a minimal level of taxation in order to maximize the protection of liberty. Compulsory taxation of individuals, such as income tax, is often justified on grounds including territorial sovereignty, and the social contract. Defenders of business taxation argue that it is an efficient method of taxing income that ultimately flows to individuals, or that separate taxation of business is justified on the grounds that commercial activity necessarily involves use of publicly established and maintained economic infrastructure, and that businesses are in effect charged for this use.[36] Georgist economists argue that all of the economic rent collected from natural resources (land, mineral extraction, fishing quotas, etc.) is unearned income, and belongs to the community rather than any individual. They advocate a high tax (the "Single Tax") on land and other natural resources to return this unearned income to the state, but no other taxes.


[edit] Optimal taxation theory Main article: Optimal tax Most governments take revenue which exceeds that which can be provided by non-distortionary taxes or through taxes which give a double dividend. Optimal taxation theory is the branch of economics that considers how taxes can be structured to give the least deadweight costs, or to give the best outcomes in terms of social welfare. The Ramsey problem deals with minimizing deadweight costs. Because deadweight costs are related to the elasticity of supply and demand for a good, it follows that putting the highest tax rates on the goods for which there is most inelastic supply and demand will result in the least overall deadweight costs. Some economists sought to integrate optimal tax theory with the social welfare function, which is the economic expression of the idea that equality is valuable to a greater or lesser extent. If individuals experience diminishing returns from income, then the optimum distribution of income for society involves a progressive income tax. Mirrlees optimal income tax is a detailed theoretical model of the optimum progressive income tax along these lines. Over the last years the validity of the theory of optimal taxation was discussed by many political economists. Canegrati (2007) demonstrated that if we move from the assumption that governments do not maximise the welfare of society but the probability of winning elections, the tax rates in equilibrium are lower for the most powerful groups of society, instead of being the lowest for the poorest as in the optimal theory of direct taxation developed by Atkinson and Joseph Stiglitz. See Canegrati's formulae. [edit] Views opposed to taxation Because payment of tax is compulsory and enforced by the legal system, some political philosophies view taxation as theft (or as a violation of property rights), or tyranny, accusing the government of levying taxes via force and coercive means.[37] Voluntaryists, Individualist anarchists, objectivists, anarcho-capitalists, and libertarians see taxation as government aggression (see zero aggression principle). The view that democracy legitimizes taxation is rejected by those who argue that all forms of government, including laws chosen by democratic means, are fundamentally oppressive. According to Ludwig von Mises, "society as a whole" should not make such decisions, due to methodological individualism.[38] Libertarian opponents of taxation claim that governmental protection, such as police and defense forces might be replaced by market alternatives such as private defense agencies, arbitration agencies or voluntary contributions.[39] Walter E. Williams, professor of economics at George Mason University, stated "Government income redistribution programs produce the same result as theft. In fact, that's what a thief does; he redistributes income. The difference between government and thievery is mostly a matter of legality."[40] Discourse surrounding taxation generally places an emphasis on the intended benefits (healthcare, schools and so on), but rarely points to the harm caused by forced removal of possessions. Taxation has also been opposed by communists and socialists. Karl Marx assumed that taxation would be unnecessary after the advent of communism and looked forward to the "withering away of the state". In socialist economies such as that of China, taxation played a minor role, since most government income was derived from the ownership of enterprises, and it was argued by some that taxation was not necessary.[41] While the morality of taxation is sometimes questioned, most arguments about taxation revolve around the degree and method of taxation and associated government spending, not taxation itself.


[edit] Effects of income taxation on division of labor If a tax is paid on outsourced services that is not also charged on services performed for oneself, then it may be cheaper to perform the services oneself than to pay someone else — even considering losses in economic efficiency.[42][43] For example, suppose jobs A and B are both valued at $1 on the market. And suppose that because of your unique abilities, you can do job A twice over (100% extra output) in the same effort as it would take you to do job B. But job B is the one that you need done right now. Under perfect division of labor, you would do job A and somebody else would do job B. Your unique abilities would always be rewarded. Income taxation has the worst effect on division of labor in the form of barter. Suppose that the person doing job B is actually interested in having job A done for him. Now suppose you could amazingly do job A four times over, selling half your work on the market for cash just to pay your tax bill. The other half of the work you do for somebody who does job B twice over but he has to sell off half to pay his tax bill. You're left with one unit of job B, but only if you were 400% as productive doing job A! In this case of 50% tax on barter income, anything less than 400% productivity will cause the division of labor to fail. In summary, depending on the situation a 50% tax rate can cause the division of labor to fail even where productivity gains of up to 300% would have resulted. Even a mere 30% tax rate can negate the advantage of a 100% productivity gain.[44]


A value added tax (VAT) is a form of consumption tax. It is a tax on the "value added" to a product or material, from an accounting view, at each stage of its manufacture or distribution. The "value added" to a product by a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products from another business. The reason businesses end up paying no tax is that at the time they sell the product, they receive a credit for all the tax they have paid to suppliers. Maurice Lauré, Joint Director of the French Tax Authority, the Direction générale des impôts, was first to introduce VAT on April 10, 1954, although German industrialist Dr. Wilhelm von Siemens proposed the concept in 1918. Initially directed at large businesses, it was extended over time to include all business sectors. In France, it is the most important source of state finance, accounting for nearly 50% of state revenues.[1] Personal end-consumers of products and services cannot recover VAT on purchases, but businesses are able to recover VAT (input tax) on the products and services that they buy in order to produce further goods or services that will be sold to yet another business in the supply chain or directly to a final consumer. In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state. Value Added Taxes were introduced in part because they create stronger incentives to collect than a sales tax does. Both types of consumption tax create an incentive by end consumers to avoid or evade the tax. But the sales tax offers the buyer a mechanism to avoid or evade the tax--persuade the seller that he is not really an end consumer, and therefore the seller is not legally required to collect it. The burden of determining whether the buyer's motivation is to consume or re-sell is on the seller, but the seller has no direct economic incentive to the seller to collect it. The VAT approach gives sellers a direct financial stake in collecting the tax, and eliminates the problematic decision by the seller about whether the buyer is or is not an end consumer. Contents

• •

1 Comparison with a sales tax o 1.1 Principle of VAT o 1.2 Basis for VATs o 1.3 Example 1.3.1 Without any tax 1.3.2 With a North American (Canadian provincial and U.S. state) sales tax 1.3.3 With a value added tax 1.3.4 Limitations to example and VAT 2 Criticisms 3 VAT systems o 3.1 European Union o 3.2 The Nordic countries o 3.3 India 3.3.1 The Andhra Pradesh experience o 3.4 Gulf Cooperation Council o 3.5 Mexico o 3.6 New Zealand o 3.7 Australia o 3.8 Canada


• • • • •

o 3.9 United States 4 Tax rates o 4.1 EU countries o 4.2 Non-EU countries 5 VAT registered 6 See also 7 Notes 8 References 9 External links

[edit] Comparison with a sales tax Value added tax (VAT) avoids the cascade effect of sales tax by taxing only the value added at each stage of production. For this reason, throughout the world, VAT has been gaining favour over traditional sales taxes. In principle, VAT applies to all provisions of goods and services. VAT is assessed and collected on the value of goods or services that have been provided every time there is a transaction (sale/purchase). The seller charges VAT to the buyer, and the seller pays this VAT to the government. If, however, the purchaser is not an end user, but the goods or services purchased are costs to its business, the tax it has paid for such purchases can be deducted from the tax it charges to its customers. The government only receives the difference; in other words, it is paid tax on the gross margin of each transaction, by each participant in the sales chain. In many developing countries such as India, sales tax/VAT are key revenue sources as high unemployment and low per capita income render other income sources inadequate. However, there is strong opposition to this by many sub-national governments as it leads to an overall reduction in the revenue they collect as well as a loss of some autonomy. Sales tax is normally charged on end users (consumers). The VAT mechanism means that the end-user tax is the same as it would be with a sales tax. The main difference is the extra accounting required by those in the middle of the supply chain; this disadvantage of VAT is balanced by application of the same tax to each member of the production chain regardless of its position in it and the position of its customers, reducing the effort required to check and certify their status. When the VAT system has few, if any, exemptions such as with GST in New Zealand, payment of VAT is even simpler. A general economic idea is that if sales taxes exceed 10%, people start engaging in widespread tax evading activity (like buying over the Internet, pretending to be a business, buying at wholesale, buying products through an employer etc.) On the other hand, total VAT rates can rise above 10% without widespread evasion because of the novel collection mechanism.[citation needed] However, because of its particular mechanism of collection, VAT becomes quite easily the target of specific frauds like carousel fraud, which can be very expensive in terms of loss of tax incomes for states. [edit] Principle of VAT The standard way to implement a VAT involves assuming a business owes some percentage on the price of the product minus all taxes previously paid on the good. If VAT rates were 10%, an orange juice maker would pay 10% of the £5 per litre price (£0.50) minus taxes previously paid by the orange farmer (maybe £0.20). In this example, the orange juice maker would have a £0.30 tax liability. Each business has a strong incentive for its suppliers to pay their taxes, allowing VAT rates to be higher with less tax evasion than a retail sales tax. Behind this simple principle are the variations in its implementations, as discussed in the next section. [edit] Basis for VATs


By the method of collection, VAT can be accounts-based or invoice-based.[2] Under the invoice method of collection, each seller charges VAT rate on his output and passes the buyer a special invoice that indicates the amount of tax charged. Buyers who are subject to VAT on their own sales (output tax), consider the tax on the purchase invoices as input tax and can deduct the sum from their own VAT liability. The difference between output tax and input tax is paid to the government (or a refund is claimed, in the case of negative liability). Under the accounts based method, no such specific invoices are used. Instead, the tax is calculated on the value added, measured as a difference between revenues and allowable purchases. Most countries today use the invoice method, the only exception being Japan, which uses the accounts method. By the timing of collection,[3] VAT (as well as accounting in general) can be either accrual or cash based. Cash basis accounting is a very simple form of accounting. When a payment is received for the sale of goods or services, a deposit is made, and the revenue is recorded as of the date of the receipt of funds — no matter when the sale had been made. Cheques are written when funds are available to pay bills, and the expense is recorded as of the cheque date — regardless of when the expense had been incurred. The primary focus is on the amount of cash in the bank, and the secondary focus is on making sure all bills are paid. Little effort is made to match revenues to the time period in which they are earned, or to match expenses to the time period in which they are incurred. Accrual basis accounting matches revenues to the time period in which they are earned and matches expenses to the time period in which they are incurred. While it is more complex than cash basis accounting, it provides much more information about your business. The accrual basis allows you to track receivables (amounts due from customers on credit sales) and payables (amounts due to vendors on credit purchases). The accrual basis allows you to match revenues to the expenses incurred in earning them, giving you more meaningful financial reports. Further information: Comparison of Cash Method and Accrual Method of accounting [edit] Example Consider the manufacture and sale of any item, which in this case we will call a widget. In what follows, the term "gross margin" is used rather than "profit". Profit is only what is left after paying other costs, such as rent and personnel. [edit] Without any tax
• • •

A widget manufacturer spends $1.00 on raw materials and uses them to make a widget. The widget is sold wholesale to a widget retailer for $1.20, making a gross margin of $0.20. The widget retailer then sells the widget to a widget consumer for $1.50, making a gross margin of $0.30.

[edit] With a North American (Canadian provincial and U.S. state) sales tax With a 10% sales tax:• • •

The manufacturer pays $1.00 for the raw materials, certifying it is not a final consumer. The manufacturer charges the retailer $1.20, checking that the retailer is not a consumer, leaving the same gross margin of $0.20. The retailer charges the consumer $1.65 ($1.50 + ($1.50 x 10%)) and pays the government $0.15, leaving the gross margin of $0.30.

So the consumer has paid 10% ($0.15) extra, compared to the no taxation scheme, and the government has collected this amount in taxation. The retailers have not paid any tax directly (it is the consumer who has paid the tax), but the retailer has to do the paperwork in order to correctly pass on to the government the sales tax it has collected. Suppliers and manufacturers only have the administrative burden of supplying correct certifications, and checking that their customers (retailers) aren't consumers.


This is, of course, all theory. In practice a retailer specializes in sales to consumers. Retailers tend to sell a large variety of products and have enough on hand for their trade until the next supply shipment comes in, but not enough on hand, for example, to sell 100,000 widgets to one customer. In another example, for clarification, a consumer cannot wander into a grocery store and make a point-of-sale purchase for 10,000 rolls of toilet paper. On the other hand, there is nothing to prevent a nonconsumer from avoiding tax at "retail" establishments that cater to both consumers and non-end-users. However the burden is on the non-end-users to provide the business license, exemption certificate, etc., necessary for exemption from sales taxes ordinarily collected by the retail establishment. A large exception to this state of affairs which is growing exponentially is online sales. Typically if the online retail firm has no "presence" in the state where the merchandise will be delivered, no obligation is imposed upon the retailer to collect sales taxes from "out-ofstate" purchasers. Generally, state law requires that the purchaser report such purchases to the state taxing authority and pay the sales tax. It is fair to say that many citizens are unaware of this obligation and that states make little effort to raise that awareness or provide a reasonably easy way of complying with the obligation. No one expects this happy state of affairs to last forever. has been targeted. so far it has responded on a case-by-case basis. Colorado has recently attempted to to require Amazon to remit sales taxes on sales by Colorado-based "affiliates." Amazon preemptively cut ties with those affiliates. [edit] With a value added tax With a 10% VAT:
• • •

The manufacturer pays $1.10 ($1 + ($1 x 10%)) for the raw materials, and the seller of the raw materials pays the government $0.10. The manufacturer charges the retailer $1.32 ($1.20 + ($1.20 x 10%)) and pays the government $0.02 ($0.12 minus $0.10), leaving the same gross margin of $0.20. ($1.32 - $0.02 - $1.10 = $0.20) The retailer charges the consumer $1.65 ($1.50 + ($1.50 x 10%)) and pays the government $0.03 ($0.15 minus $0.12), leaving the same gross margin of $0.30 ($1.65 - $0.03 - $1.32 = $0.30).

With VAT, the consumer has paid, and the government received, the same as with sales tax. The businesses have not incurred any tax themselves. Their obligation is limited to assuming the necessary paperwork in order to pass on to the government the difference between what they collect in VAT (output tax, an 11th of their sales) and what they spend in VAT (input VAT, an 11th of their expenditure on goods and services subject to VAT). However they are freed from any obligation to request certifications from purchasers who are not end users, and of providing such certifications to their suppliers. The advantage of the VAT system over the sales tax system is that under sales tax, the seller has no incentive to disbelieve a purchaser who says it is not a final user. That is to say the payer of the tax has no incentive to collect the tax. Under VAT, all sellers collect tax and pay it to the government. A purchaser has an incentive to deduct input VAT, but must prove it has the right to do so, which is usually achieved by holding an invoice quoting the VAT paid on the purchase, and indicating the VAT registration number of the supplier. There are no problems with online sales in the VAT system. All buyers pay VAT and if the buyer is a company, they deduct the VAT. A company can buy consumer items they need in small quantities, like coffee and toilet paper, in a shop without certifying they are not a consumer. [edit] Limitations to example and VAT In the above example, we assumed that the same number of widgets were made and sold both before and after the introduction of the tax. This is not true in real life. The fundamentals of supply and demand suggest that any tax raises the cost of transaction for someone, whether it is the seller or purchaser. In raising the cost, either the demand curve shifts leftward, or the supply


curve shifts upward. The two are functionally equivalent. Consequently, the quantity of a good purchased decreases, and/or the price for which it is sold increases. This shift in supply and demand is not incorporated into the above example, for simplicity and because these effects are different for every type of good. The above example assumes the tax is non-distortionary. A VAT, like most taxes, distorts what would have happened without it. Because the price for someone rises, the quantity of goods traded decreases. Correspondingly, some people are worse off by more than the government is made better off by tax income. That is, more is lost due to supply and demand shifts than is gained in tax. This is known as a deadweight loss. The income lost by the economy is greater than the government's income; the tax is inefficient. The entire amount of the government's income (the tax revenue) may not be a deadweight drag, if the tax revenue is used for productive spending or has positive externalities in other words, governments may do more than simply consume the tax income. While distortions occur, consumption taxes like VAT are often considered superior because they distort incentives to invest, save and work less than most other types of taxation - in other words, a VAT discourages consumption rather than production.

A Supply-Demand Analysis of a Taxed Market In the above diagram,
• • • •

Deadweight loss: the area of the triangle formed by the tax income box, the original supply curve, and the demand curve Governments tax income: the grey rectangle that says "tax revenue" Total consumer surplus after the shift: the green area Total producer surplus after the shift: the yellow area

[edit] Criticisms The "value-added tax" has been criticized as the burden of it relies on personal end-consumers of products. Some critics consider it to be a regressive tax, meaning the poor pay more, as a percentage of their income, than the rich. Defenders argue that excising taxation through income is an arbitrary standard, and that the value-added tax is in fact a proportional tax in that people with higher income pay more at the same rate that they consume more. The effective progressiveness or regressiveness of a VAT system can also be affected when different classes of goods are taxed at different rates. To maintain the progressive nature of total taxes on individuals, countries implementing VAT have reduced income tax on lower income-earners, as well as instituted direct transfer payments to lower-income groups, resulting in lower tax burdens on the poor.[4] Revenues from a value added tax are frequently lower than expected because they are difficult and costly to administer and collect. In many countries, however, where collection of personal income taxes and corporate


profit taxes has been historically weak, VAT collection has been more successful than other types of taxes. VAT has become more important in many jurisdictions as tariff levels have fallen worldwide due to trade liberalization, as VAT has essentially replaced lost tariff revenues. Whether the costs and distortions of value added taxes are lower than the economic inefficiencies and enforcement issues (e.g. smuggling) from high import tariffs is debated, but theory suggests value added taxes are far more efficient. Certain industries (small-scale services, for example) tend to have more VAT avoidance, particularly where cash transactions predominate, and VAT may be criticized for encouraging this. From the perspective of government, however, VAT may be preferable because it captures at least some of the value-added. For example, a carpenter may offer to provide services for cash (i.e. without a receipt, and without VAT) to a homeowner, who usually cannot claim input VAT back. The homeowner will hence bear lower costs and the carpenter may be able to avoid other taxes (profit or payroll taxes). The government, however, may still receive VAT for various other inputs (lumber, paint, gasoline, tools, etc.) sold to the carpenter, who would be unable to reclaim the VAT on these inputs (unless of course the carpenter also has at least some jobs done with receipt, and claims all purchased inputs to go to those jobs). While the total tax receipts may be lower compared to full compliance, it may not be lower than under other feasible taxation systems. Because exports are generally zero-rated (and VAT refunded or offset against other taxes), this is often where VAT fraud occurs. In Europe, the main source of problems is called carousel fraud. Large quantities of valuable goods (often microchips or mobile phones) are transported from one member state to another. During these transactions, some companies owe VAT, others acquire a right to reclaim VAT. The first companies, called 'missing traders' go bankrupt without paying. The second group of companies can 'pump' money straight out of the national treasuries.[citation needed] This kind of fraud originated in the 1970s in the Benelux-countries. Today, the British treasury is a large victim.[5] There are also similar fraud possibilities inside a country. To avoid this, in some countries like Sweden, the major owner of a limited company is personally responsible for taxes. This is circumvented by having an unemployed person without assets as the formal owner.[citation needed] [edit] VAT systems [edit] European Union Main article: European Union Value Added Tax The European Union Value Added Tax (EU VAT) is a value added tax encompassing member states in the European Union Value Added Tax Area. Joining in this is compulsory for member states of the European Union. As a consumption tax, the EU VAT taxes the consumption of goods and services in the EU VAT area. The EU VAT's key issue asks where the supply and consumption occurs thereby determining which member state will collect the VAT and which VAT rate will be charged. Each Member State's national VAT legislation must comply with the provisions of EU VAT law as set out in Directive 2006/112/EC. This Directive sets out the basic framework for EU VAT, but does allow Member States some degree of flexibility in implementation of VAT legislation. For example different rates of VAT are allowed in different EU member states. However Directive 2006/112 requires Member states to have a minimum standard rate of VAT of 15% and one or two reduced rates not to be below 5%. Some Member States have a 0% VAT rate on certain supplies- these Member States would have agreed this as part of their EU Accession Treaty (for example, newspapers and certain magazines in Belgium). The current maximum rate in operation in the EU is 25%, though member states are free to set higher rates. VAT that is charged by a business and paid by its customers is known as "output VAT" (that is, VAT on its output supplies). VAT that is paid by a business to other businesses on the supplies that it receives is known as "input VAT" (that is, VAT on its input supplies). A business is generally able to recover input VAT to the extent that the input VAT is attributable to (that is, used to make) its taxable outputs. Input VAT is recovered


by setting it against the output VAT for which the business is required to account to the government, or, if there is an excess, by claiming a repayment from the government. The VAT Directive (prior to 1 January 2007 referred to as the Sixth VAT Directive) requires certain goods and services to be exempt from VAT (for example, postal services, medical care, lending, insurance, betting), and certain other goods and services to be exempt from VAT but subject to the ability of an EU member state to opt to charge VAT on those supplies (such as land and certain financial services). Input VAT that is attributable to exempt supplies is not recoverable, although a business can increase its prices so the customer effectively bears the cost of the 'sticking' VAT (the effective rate will be lower than the headline rate and depend on the balance between previously taxed input and labour at the exempt stage). See also: Taxation in the United Kingdom#Value added tax [edit] The Nordic countries MOMS (Danish: merværdiafgift, formerly meromsætningsafgift), Norwegian: merverdiavgift (bokmål) or meirverdiavgift (nynorsk) (abbreviated MVA), Swedish: mervärdesskatt (earlier mervärdesomsättningsskatt), Icelandic: virðisaukaskattur (abbreviated VSK) or Finnish: arvonlisävero (abbreviated ALV) are the Nordic terms for VAT. Like other countries' sales and VAT taxes, it is an indirect tax. In Denmark, VAT is generally applied at one rate, and with few exceptions is not split into two or more rates as in other countries (e.g. Germany), where reduced rates apply to essential goods such as foodstuffs. The current standard rate of VAT in Denmark is 25%. That makes Denmark one of the countries with the highest value added tax, alongside Norway and Sweden. A number of services has reduced VAT, for instance public transportation of private persons, health care services, publishing newspapers, rent of premises (the lessor can, though, voluntarily register as VAT payer, except for residential premises), and travel agency operations. In Finland, the standard rate of VAT is 23%, along with all other VAT rates, excluding the zero rate.[6] In addition, two reduced rates are in use: 12% (reduced in October 2009 from 17% for non-restaurant food, from July 2010 will encompass restaurant food also), which is applied on food and animal feed, and 8%, which is applied on passenger transportation services, cinema performances, physical exercise services, books, pharmaceuticals, entrance fees to commercial cultural and entertainment events and facilities. Supplies of some goods and services are exempt under the conditions defined in the Finnish VAT Act: hospital and medical care; social welfare services; educational, financial and insurance services; lotteries and money games; transactions concerning bank notes and coins used as legal tender; real property including building land; certain transactions carried out by blind persons and interpretation services for deaf persons. The seller of these tax-exempt services or goods is not subject to VAT and does not pay tax on sales. Such sellers therefore may not deduct VAT included in the purchase prices of his inputs. In Iceland, VAT is split into two levels: 25.5% for most goods and services but 7% for certain goods and services. The 7% level is applied for hotel and guesthouse stays, licence fees for radio stations (namely RÚV), newspapers and magazines, books; hot water, electricity and oil for heating houses, food for human consumption (but not alcoholic beverages), access to toll roads and music. In Norway, VAT is split into three levels: 25% is the general VAT, 14% (formerly 13%, up on January 1, 2007) for foods and restaurant take-out (food eaten in a restaurant has 25%), 8% for person transport, movie tickets, and hotel stays. Books and newspapers are free of VAT, while magazines and periodicals with a less than 80% subscription rate are taxed. Svalbard has no VAT because of a clause in the Svalbard Treaty. Cultural events are excluded from VAT. In Sweden, VAT is split into three levels: 25% for most goods and services including restaurants bills, 12% for foods (incl. bring home from restaurants) and hotel stays (but breakfast at 25%) and 6% for printed matter, cultural services, and transport of private persons. Some services are not taxable for example education of


children and adults if public utility, and health and dental care, but education is taxable at 25% in case of courses for adults at a private school. Dance events (for the guests) have 25%, concerts and stage shows have 6%, and some types of cultural events have 0%. MOMS replaced OMS (Danish "omsætningsafgift", Swedish "omsättningsskatt") in 1967, which was a tax applied exclusively for retailers. Year Tax level (Denmark) Name 1962 9% 1967 10% 1968 12.5% 1970 15% 1977 18% 1978 20.25% 1980 22% 1992 25% [edit] India VAT is introduced into the Indian taxation system from 1st April 2005. Of the 28 Indian states, eight did not introduce VAT. Haryana had already adopted it on 1 April 2004. OECD (2008, 112-13) approvingly cites Chanchal Kumar Sharma (2005) to answer why it has proved so difficult to implement a federal VAT in India. The book says: "Although the implementation of broad-base federal VAT system has been considered as the most desirable consumption tax for India since the early 1990s, such a reform would involve serious problems for the finances of regional governments. In addition, implementing VAT in India in context of current economic reforms would have paradoxical dimensions for Indian federalism. On one hand economic reforms have led to decentralization of expenditure responsibilities, which in turn demands more decentralization of revenue raising power if fiscal accountability is to be maintained. On the other hand, implementing VAT (to make India a single integrated market) would lead to revenue losses for the States and reduce their autonomy indicating greater centralization" (Sharma, 2005, as quoted in OECD, 2008, 112-13) [6] Chanchal Kumar Sharma (2005:929) asserts: "political compulsions have led the government to propose an imperfect model of VAT" 'Indian VAT system is imperfect' to the extent it 'goes against the basic premise of VAT'. India seems to have an 'essenceless VAT' because the very reasons for which VAT receives academic support have been disregarded by the VAT-Indian Style, namely: removal of the distortions in movement of goods across states; Uniformity in tax structure. Chanchal Kumar Sharma (2005:929) clearly states, "Local or state level taxes like octroi, entry tax, lease tax, workers contract tax, entertainment tax and luxury tax are not integrated into the new regime, which goes against the basic premise of VAT, which is to have uniformity in the tax structure. The fact that no tax credit will be allowed for inter-state trade seriously undermines the basic benefit of enforcing a VAT system, namely the removal of the distortions in movement of goods across the states." "Even the most essential prerequisite for success of VAT i.e. elimination of [Central sales tax (CST)] has been deferred. CST is levied on basis of origin and collected by the exporting state; the consumers of the OMS MOMS MOMS MOMS MOMS MOMS MOMS MOMS


importing state bear its incidence. CST creates tax barriers to integrate the Indian market and leads to cascading impact on cost of production. Further, the denial of input tax credit on inter-state sales and inter state transfers would affect free flow of goods." (Sharma,2005:922) The greatest challenge in India, asserts Sharma (2005) is to design a sales tax system that will provide autonomy to subnational levels to fix tax rate, without compromising efficiency or creating enforcement problems. [edit] The Andhra Pradesh experience In the Indian state of Andhra Pradesh, the Andhra Pradesh Value Added Tax Act, 2005 came into force on 1 April 2005 and contains six schedules. Schedule I contains goods generally exempted from tax. Schedule II deals with zero rated transactions like exports. Schedule III contains goods taxable at 1%, namely jewellery made from bullion and precious stones. Goods taxable at 4% are listed under Schedule IV. The majority of foodgrains and goods of national importance, like iron and steel, are listed under this head. Schedule V deals with Standard Rate Goods, taxable at 14.5%. All goods that are not listed elsewhere in the Act fall under this head. The VI Schedule contains goods taxed at special rates, such as some liquor and petroleum products. The Act prescribes threshold limits for VAT registration - dealers with a taxable turnover of over Rs.40.00 lacs, in a tax period of 12 months, are mandatorily registered as VAT dealers. Dealers with a taxable turnover, in a tax period of 12 months, between Rs.5.00 to 40.00 lacs are registered as Turnover Tax (TOT) dealers. While the former category of dealers are eligible for input tax credit, the latter category of dealers are not. A VAT dealer pays tax at the rate specified in the Schedules. The sales of a TOT dealer are all taxable at 1%. A VAT dealer has to file a monthly return disclosing purchases and sales. A TOT dealer has to file a quarterly return disclosing only sale turnovers. While a VAT dealer can buy goods for business from anywhere in the country, a TOT dealer is barred from buying outside the State of A.P. The Act appears to be the most liberal VAT law in India[verification needed]. It has simplified the registration procedures and provides for across the board input tax credit (with a few exceptions) for business transactions.[verification needed] A unique feature of registration in Andhra Pradesh is the facility of voluntary VAT registration and input tax credit for start-ups. The act not only provides for tax refunds for exporters (refund of tax paid on inputs used in the manufacture of goods exported) but also provides for refund of tax in cases where the inputs are taxed at 12.5% and outputs are taxed at 4%. [edit] Gulf Cooperation Council Main article: Cooperation Council for the Arab States of the Persian Gulf Increased growth and pressure on the GCC's governments to provide infrastructure to support growing urban centers, the Member States of the Persian Gulf Cooperation Treaty, which together make up the Gulf Cooperation Council (GCC), have felt the need to introduce a tax system in the region. In particular, the United Arab Emirates (UAE) has clarified that government officials are studying the situation and considering implementation of a Value Added Tax. [7] [edit] Mexico Value added tax (Spanish: Impuesto al Valor Agregado, IVA) is a tax applied in Mexico and other countries of Latin America. In Chile it is also called Impuesto al Valor Agregado and in Peru it is called Impuesto General a las Ventas or IGV.


Prior to the IVA, a sales tax (Spanish: impuesto a las ventas) had been applied in Mexico. In September 1966, the first attempt to apply the IVA took place when revenue experts declared that the IVA should be a modern equivalent of the sales tax as it occurred in France. At the convention of the Inter-American Center of Revenue Administrators in April and May 1967, the Mexican representation declared that the application of a value added tax would not be possible in Mexico at the time. In November 1967, other experts declared that although this is one of the most equitable indirect taxes, its application in Mexico could not take place. In response to these statements, direct sampling of members in the private sector took place as well as field trips to European countries where this tax was applied or soon to be applied. In 1969, the first attempt to substitute the mercantile-revenue tax for the value added tax took place. On December 29, 1978 the Federal government published the official application of the tax beginning on January 1, 1980 in the Official Journal of the Federation. As of 2010, the general VAT rate is 16%. This rate is applied all over Mexico except for the region bordering the United States, where the rate is 11%. The main exemptions are for books, food, and medicines on a 0% basis. Also some services are exempt like a doctor's medical attention. [edit] New Zealand Main article: Goods and Services Tax (New Zealand) Goods and Services Tax (GST) is a Value Added Tax introduced in New Zealand in 1986, which is currently 15%. It is notable for exempting few items from the tax. Before the increase on 1 October 2010 GST was 12.5%. [edit] Australia Main article: Goods and Services Tax (Australia) Goods and Services Tax (GST) is a Value Added Tax introduced in Australia in 2000, which is collected by the Federal Government but a percentage is given to the State Governments. The Australian Constitution restricts the ability of individual States to collect excises or sales taxes. Whilst the rate is currently set at 10%, there are many domestically consumed items that are effectively zero-rated (GST-free) such as fresh food, education, and health services, as well as exemptions for Government charges and fees that are themselves in the nature of taxes. [edit] Canada Main article: Goods and Services Tax (Canada) Main article: Harmonized Sales Tax Goods and Services Tax (GST) is a Value Added Tax introduced by the Federal Government in 1991 at a rate of 7%, later reduced to the current rate of 5%. A Harmonized Sales Tax (combined GST and provincial sales tax) is collected in New Brunswick, Newfoundland (13%), Nova Scotia (15%), Ontario (13%) and British Columbia (12%). Advertised prices for goods generally do not include taxes; instead, tax is calculated at the cash register. Basic groceries, prescription drugs, inward/outbound transportation and medical devices are exempt. [edit] United States Most states have a retail sales tax charged to the end buyer only. Unlike in the VAT, wholesale sales and sales of raw materials or unfinished goods are not taxed. A common misconception is that sales to businesses are untaxed. Sales to businesses are taxed if the business (or its workers) are the end users of a consumer good.


State sales taxes range from 0%-13% and municipalities often add an additional tax in the form of a local sales tax.[8] In most stores, the price tags and/or advertised prices do not include the taxes, and the taxes are added at the cash register before the customer pays. In some states, no sales tax is charged for services. (In many states, a use tax is imposed on items ordered online or purchased in a state with lower or no sales tax, and brought into the taxpayer's home state.) This is a key difference between most sales taxes levied throughout the United States and the value added tax system in many other countries. In the United States, the state of Michigan used a form of VAT known as the "Single Business Tax" (SBT) as its form of general business taxation. It is the only state in the United States to have used a VAT. When it was adopted in 1975, it replaced seven business taxes, including a corporate income tax. On August 9, 2006, the Michigan Legislature approved voter-initiated legislation to repeal the Single Business Tax, which became effective January 1, 2009.[9] House Speaker Nancy Pelosi stated in October 2009 that a new, national VAT was "on the table" to help the federal government garner needed revenues.[10] After her speech, the Americans for Tax Reform group urged the public to contact their members of Congress to oppose this potential measure.[11] President Barack Obama was reported to be open to a national VAT.[12] One day later, US Treasury Secretary Tim Geithner stated that President Obama does not support a VAT for the US.[13] Robert J. Samuelson has estimated that a VAT would need to be about 16 percent because, although an 8 percent VAT would theoretically suffice, there would be huge pressures to exempt groceries, rent and housing, health care, education, and charitable groups.[14] [edit] Tax rates [edit] EU countries Country Austria Belgium Bulgaria Cyprus Czech Republic Standard rate 20%[15] 21%[15] 20%[15] 15%[15] 20%[15] Reduced rate 12% or 10% Abbr. USt. Name Umsatzsteuer Belasting over de toegevoegde waarde Taxe sur la Valeur Ajoutée Mehrwertsteuer Данък добавена стойност Φόρος Προστιθέμενης Αξίας Daň z přidané hodnoty Meromsætningsafgift

BTW 12% or 6% or 0% in TVA some cases MWSt 7% or 0% ДДС 5% (8% for taxi and bus ΦΠΑ transportation) 10% none 9% 13% or 9% DPH moms

[16][15] Denmark 25% 20%[15] Estonia



19.6%[15] France Germany 19%[15] 23%[18][15] Greece (16% on islands) Hungary 25%[19][15] Ireland 21%[20][15]

5.5% or 2.1% 7% or 0% 11% or 5.5% ΦΠΑ (8% and 4% on islands) 18% or 5% ÁFA CBL 13.5% or 4.8% or 0% VAT

km käibemaks ALV Arvonlisävero Moms Mervärdesskatt TVA Taxe sur la valeur ajoutée MwSt./USt. Mehrwertsteuer/Umsatzsteuer Φόρος Προστιθέμενης Αξίας Általános forgalmi adó Cáin Bhreisluacha (Irish) Value Added Tax (English)


20%[15] Italy Latvia 21%[15] Lithuania 21%[15]
[15] Luxembourg 15% 18%[15] Malta

10% or 4% 10% or 0% 9% or 5%


Imposta sul Valore Aggiunto Pievienotās vērtības nodoklis Pridėtinės vertės mokestis Taxe sur la Valeur Ajoutée Taxxa tal-Valur Miżjud Belasting over de toegevoegde waarde Podatek od towarów i usług

12% or 9% or 6% or 3% TVA 5% 6% or 0% VAT BTW



22%[15] (will increase PTU/VAT to 23% from January 7% or 3% or 0% Poland 1, 2011)[21] 21%[22][15] (Increasing to 23% possibly in 13% or 6% July 2011[23]) 8% or 4% in Madeira and IVA Portugal 15% in Madeira and Azores (Minimum 70% Azores (Minimum of mainland rate[25]) 70% of mainland rate[24]) 9% or 5% for first time buyers of new homes TVA Romania 24%[26] under special conditions [15] 10% or 6% DPH Slovakia 19% [15] Slovenia 20% 8.5% DDV Spain Sweden United Kingdom 8% or 4%[28][15] 18%[27][15] IVA 2% or 0% in Canary 5% in Canary Islands IGIC Islands 25%[15] 12% or 6% [15] 17.5% (will increase to 20% from 5% or 0% January 4, 2011)[29] Moms VAT TAW

Imposto sobre Acrescentado



Taxa pe valoarea adăugată Daň z pridanej hodnoty Davek na dodano vrednost Impuesto sobre el Valor Añadido Impuesto General Indirecto Canario Mervärdesskatt Value Added Treth Ar Werth Tax

[edit] Non-EU countries Country Albania Andorra[30] Azerbaijan Argentina Armenia Australia Belarus Standard rate 20% 4.5% 18% 21% 20% 10% 20% Reduced rate 0% 1% 10.5% or 0% 10.5% or 0% 0% 0% Local name TVSH = Tatimi mbi Vlerën e Shtuar IVA = Impost sobre el Valor Afegit ƏDV = Əlavə dəyər vergisi IVA = Impuesto al Valor Agregado AAH = Avelac’vaç aržek’i hark ԱԱՀ = Ավելացված արժեքի հարկ GST = Goods and Services Tax ПДВ = Падатак на дададзеную вартасьць VAT = Value Added Tax PDV = Porez na dodanu vrijednost

15% Barbados Bosnia and 17% Herzegovina




12% + 25% + 0% 5%

*IPI - 12% = Imposto sobre produtos industrializados (Tax over industrialized products) - Federal Tax ICMS - 25% = Imposto sobre circulação e serviços (Tax over commercialization and services) State Tax ISS - 5% = Imposto sobre serviço de qualquer natureza (Tax over any service) City tax *IPI = Imposto sobre produtos industrializados (Tax over industrialized products) can reach 60% over imported products. IVA = Impuesto al Valor Agregado GST = Goods and Services Tax, TPS = Taxe sur les produits et services; HST1 = Harmonized Sales Tax, TVH = Taxe de vente harmonisée IVA = Impuesto al Valor Agregado IVA = Impuesto al Valor Agregado

Bolivia Canada Chile Colombia

13% 5% GST+0%5%/0%2 10%PST(HST) 19% 16% 6% or 3% 10% or 0% 12% or 0%

People's Republic of 17% 3 China Croatia 23% Dominican 16% Republic 12% Ecuador Egypt El Salvador Ethiopia Fiji Georgia Guatemala Guyana[31] Iran Iceland India

增值税 (pinyin:zēng zhí shuì) PDV = Porez na dodanu vrijednost ITBIS = Impuesto sobre Transferencia de Bienes Industrializados y Servicios IVA = Impuesto al Valor Agregado VAT = Value Added Tax (‫ةبيرضلا‬ ‫)ةفاضملا ةميقلا ىلع‬ IVA = Impuesto al Valor Agregado VAT = Value Added Tax VAT = Value Added Tax DGhG = Damatebuli Ghirebulebis gdasakhadi დღგ = დამატებული ღირებულების გადასახადი IVA = Impuesto al Valor Agregado VAT = Value Added Tax VAT = Value Added Tax (‫رب تاﯼلام‬ ‫)ﻩدوزفا شزرا‬ VSK, VASK = Virðisaukaskattur VAT = Valued Added Tax PPN = Pajak Pertambahan Nilai Ma'am = ‫ףסומ ךרע סמ‬ Consumption tax = 消費税

10% 13% 15% 12.5% 18% 12% 16% 3% 25.5% 12.5% 10% 16% 5%

0% 0%


7%4 4%, 1%, or 0% 5%

Indonesia Israel



VAT = 부가세(附加稅, Bugase) = South Korea 10% Jersey8 Jordan 3% 16% 0% 부가가치세(附加價値稅, Bugagachise) GST = Goods and Services Tax GST = Goods and Sales Tax ҚCҚ = Қосымша салық құны (Kazakh) НДС = Налог на добавленную стоимость (Russian) VAT = Value Added Tax TVSH = Tatimi mbi Vlerën e Shtuar TVA = Taxe sur la valeur ajoutée 3.6% (lodging services) or 2.4% MWST = Mehrwertsteuer GST = Goods and Sales Tax (‫)ةفاضملا ةميقلا ىلع ةبيرضلا‬ TVA = Taxa pe Valoarea Adăugată ДДВ = Данок на Додадена Вредност, DDV = Danok na Dodadena Vrednost GST = Goods and Services Tax (Government Tax) IVA = Impuesto al Valor Agregado PDV = Porez na dodatu vrijednost VAT = Value Added Tax GST = Goods and Services Tax MVA = Merverdiavgift (bokmål) or meirverdiavgift (nynorsk) (informally moms) VAT = Value Added Tax GST = General Sales Tax ITBMS = Impuesto de Transferencia de Bienes Muebles y Servicios IVA= Impuesto al Valor Agregado IGV = Impuesto General a la Ventas RVAT = Reformed Value Added Tax, locally known as Karagdagang Buwis / Dungag nga Buhis НДС = Налог на добавленную стоимость, NDS = Nalog na dobavlennuyu stoimost’ ПДВ = Порез на додату вредност, PDV = Porez na dodatu vrednost GST = Goods and Services Tax VAT = Valued Added Tax



Kosovo Lebanon

16% 10%

Liechtenstein[32] 7.6% Morocco Moldova Macedonia Malaysia9 Mexico Montenegro 20% 20% 18% 10%

8%, 5% or 0% 5%

16% 17% 15% Mauritius New Zealand 15% Norway Palestine Pakistan Panama Paraguay Peru Philippines 25% 14.5% 16% 7% 10% 19% 12%10

11%, 0%

14% or 8%

1% or 0%


Russia Serbia Singapore

18% 18% 7%

10% or 0% 8% or 0% 0%

South Africa 14% Sri Lanka 12%



Taiwan Thailand

3.6% (hotel sector) and 2.4% (consumer goods) MWST = Mehrwertsteuer, TVA = 7.6% Temporarily changing to 3.8% Taxe sur la valeur ajoutée, IVA = 2.5% due to (8% from 2011 and Imposta sul valore aggiunto, TPV = to 2017) Invalidenversicherung Taglia sin la Plivalur (Disability insurance) funding from 2011 to 2017. 5% VAT = Value Added Tax, 7% ภาษีมูลคาเพิม ่

Trinidad and 15% Tobago 18% Turkey Ukraine Uruguay Uzbekistan Vietnam Venezuela 20% 22% 20 % 10% 12%

8% or 1% 0% 10%

5% or 0% 11%

KDV = Katma değer vergisi ПДВ = Податок на додану вартість, PDV = Podatok na dodanu vartist’. IVA = Impuesto al Valor Agregado НДС = Налог на добавленную стоимость GTGT = Giá Trị Gia Tăng IVA = Impuesto al Valor Agregado

Note 1: HST is a combined federal/provincial VAT collected in some provinces. In the rest of Canada, the GST is a 5% federal VAT and if there is a Provincial Sales Tax (PST) it is a separate non-VAT tax. Note 2: No real "reduced rate", but rebates generally available for new housing effectively reduce the tax to 4.5%. Note 3: These taxes do not apply in Hong Kong and Macau, which are financially independent as special administrative regions. Note 4: The reduced rate was 14% until 1 March 2007, when it was lowered to 7%. The reduced rate applies to heating costs, printed matter, restaurant bills, hotel stays, and most food. Note 5: VAT is not implemented in 2 of India's 28 states. Note 6: Except Eilat, where VAT is not raised.[33] Note 7: The VAT in Israel is in a state of flux. It was reduced from 18% to 17% on March 2004, to 16.5% on September 2005, then to 15.5% on July 2006. It was then raised back to 16.5% in July 2009 only to be lowered to its current rate of 16% on January 1, 2010. There are plans to further change it again in the near future, but they depend on political changes in the Israeli parliament. Note 8: The introduction of a goods and sales tax of 3% on 6 May 2008 was to replace revenue from Company Income Tax following a reduction in rates. Note 9: In the 2005 Budget, the government announced that GST would be introduced in January 2007. Many details have not yet been confirmed but it has been stated that essential goods and small businesses would be exempted or zero rated. Rates have not yet been established as of June 2007.


Note 10: The President of the Philippines has the power to raise the tax to 12% after January 1, 2006. The tax was raised to 12% on February 1.[34] [edit] VAT registered VAT registered means registered for VAT purposes, i.e. entered into an official VAT payers register of a country. Both natural persons and legal entities can be VAT registered. Countries that use VAT have established different thresholds for remuneration derived by natural persons/legal entities during a calendar year (or a different period), by exceeding which the VAT registration is compulsory. Natural persons/legal entities that are VAT registered are obliged to calculate VAT on certain goods/services that they supply and pay VAT into a particular state budget. VAT registered persons/entities are entitled to a VAT deduction under legislative regulations of a particular country. The introduction of a VAT can reduce the cash economy because businesses that wish to buy and sell with other VAT registered businesses must themselves be VAT registered.


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