Expanding tax knowledge in Namibia

In the fiscal world, governments and their respective citizens interact through a complex, intertwined relationship that ultimately allows for the exchange of certain goods and services, while simultaneously creating for the collection of money. This relationship between governments and their citizens is referred to as the “social impact.” In the social impact, citizens have the responsibility to pay taxes (both direct and indirect tax), while the government has a responsibility to deliver certain goods and services in return. In this way, the social impact remains a fundamental method of collecting taxes and fees and, in turn, generating the public revenues that make it possible to finance investments in human capital and infrastructure, and make provision for the services to be delivered to citizens and businesses.

Taxes are defined as a compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions. Similarly, others have defined tax as compulsory payments that are imposed on citizens to raise revenue in order to fund general expenditure, such as education, health and housing, for the benefit of citizens. One is now able to identify this important relationship clearly; without taxes, governments will not have any internal income, other than that which may be donated by other parties, government business dealings or borrowings received. The government therefore decides on the appropriate taxation levels that will need to be imposed on citizens, and this is usually done through tax policy formulations in order to ensure that their tax objectives are ultimately met.

Worldwide, government policy objectives drive government tax structures. There are three tax structures that governments follow. The first is known as the “Progressive Tax Structure”, where the effective tax rate increases as the tax base increases. Second is the “Proportional Tax Structure”, where the effective tax rate does not change in line with the tax base. Third is the “Regressive Tax Structure”, where the effective tax rate increases as the tax base decreases. In electing the most suitable tax structure, policymakers consider a number of aspects to ensure that the policy objectives are met. A government aiming to achieve wealth redistribution, for example, would usually prefer progressive tax rates.

Misconceptions.

The tax dynamics need to be understood clearly, as they can often lead to misconceptions. For instance, there is a common misconception that the person liable for tax is the person that is required to pay the tax, however, this is not always the case. Every so often, the person actually paying the tax does so on behalf of the person that is liable to pay the tax. To some degree, in Namibia, most employers withhold and pay the employee’s taxes to the Namibia Revenue Agency (NamRA). It is now clear that it is actually the employee that is liable to pay the tax, however the employer is responsible for the actual payment of this tax, and this is an essential concept to understand. In such an instance, and for the purposes of structuring tax policies, it is of importance to determine on whom precisely the burden of tax will fall. An additional element that policymakers should consider when developing tax policy, is the principles of taxation.

Despite the fact that there are no perfect tax policies, tax policies can be benchmarked against the commonly accepted principles of a good tax system. There are seven principles of a good tax system which policymakers need to remain cognisant of. The first is the certainty principle, which refers to the timing, the amount, and the manner in which the tax payments should be certain. The second is the equity principle, which refers to the fact that tax should be imposed according to one’s taxable ability or capacity. Third is the economic efficiency principle, which outlines that the tax should be designed in a manner not unduly influencing economic decision-making. Fourth is the flexibility principle, which refers to the fact that a good tax system should be designed in such a manner that it can easily adjust in response to changing economic circumstances. Fifth, the simplicity principle, refers to the fact that a tax system should be designed in a manner that is easy to understand and to apply. Sixth is the convenience principle, which refers to the fact that the taxes should be imposed in a manner or at a time that is convenient for the taxpayers. Lastly, the administrative efficiency principle provides that the tax system should be designed in such a manner as to not impose an unreasonable administrative burden on the taxpayer and the revenue authorities.

Policy

It is now quite evident that policymakers need to operate thoughtfully to ensure that the principles of a good tax system are incorporated in the tax policies developed. The priority of application of these principles would depend on the policy objective to be achieved. For example, the redistribution of wealth would require a focus on the equity principle in ensuring that the tax policy facilitates wealth allocation to lower income households.

These policies usually support the legislative framework that provides guidance on how the tax bases are determined, and tax legislation is usually used as the main “tax guide.” Collectively, tax legislation means, all federal, regional, state, territorial, county, municipal and local, foreign or other statutes, ordinances or regulations imposing a Tax, including all treaties, conventions, rules, regulations, orders and decrees of any jurisdiction. In Namibia, the relevant tax legislation is the Income Tax Act 24 of 1981 and the Value Added Tax Act of 2000.

In order to further widen the discussion, it is important to understand that taxes can be either direct or indirect. A direct tax is one that the taxpayer pays directly to the government. These taxes cannot be shifted to any other person or group. An indirect tax is one that can be passed on, or shifted, to another person or group by the person or business that owes it. Businesses may recover the cost of the taxes they pay by charging higher prices to customers, paying lower wages and salaries, paying lower dividends to shareholders, or accepting lower profits. Ultimately, individuals pay almost all taxes. Businesses and corporations use a tax shift to pass taxes onto their customers, clients, patients, employees, and stockholders. Direct tax is hence more legislated by the Income Tax Act, while indirect tax is more legislated by the Value Added Tax Act.