The Misconception of Taxing Inflows: Understanding Income Tax.
By Tijjani Ahmad.
A recent statement flying on social media that according to new tax law, tax will be calculated based on total inflows into personal bank accounts has sparked confusion.
According to the statement, individuals with “transactions” below โฆ800,000 would be exempt, while excess amounts above this threshold would be taxed. However, this description is misleading and it misrepresents the fundamental principles of income tax.
Income Tax vs. Transaction-Based Tax
Income tax is not levied on gross inflows, revenues, or transactions. Instead, it is charged on taxable income, which is calculated by subtracting allowable deductions from total income earned. This distinction is critical, as it directly affects how individuals and businesses determine their tax liabilities.
ย ย How Taxable Income Works:
To calculate taxable income, one must consider the following steps:
1. Determine total income earned (from various sources, such as employment, business, or investments).
2. Identify allowable deductions (e.g., expenses related to earning income, charitable donations, or pension contributions etc).
3. Subtract these deductions from total income to arrive at taxable income.
4. Taxable Income is what remains after all the deductions.
5. Tax rate is applied on the taxable income
Implications of the Misunderstanding:
The misconception that income tax is charged on inflows or transactions, rather than taxable income, can lead to:
1. Inaccurate tax assessments
2. Unnecessary tax burdens on individuals and businesses
3. Disincentives for economic growth and investment
It is essential to understand the principles of income tax and how taxable income is calculated.
By recognizing the difference between income tax and transaction-based taxes, individuals and businesses can better navigate the tax landscape and make informed decisions.
Clarity on tax policies will help promote a more favorable business environment and support economic development.
Thank you