Question Tag: Taxpayer Burden

Merits of Withholding Tax

1. Faster Mobilisation of Revenue: Withholding tax ensures faster mobilisation of revenue to the state, as the tax is collected upfront before returns are made.
2. Expansion of Tax Net: It helps in expanding the tax net, bringing in taxpayers who may not otherwise be compliant.
3. Accurate Determination of Taxpayer’s Turnover: By withholding tax at source, the authorities can more easily ascertain the taxpayer’s actual turnover and hence the correct income.
4. Low Collection Costs: The system involves little to no additional cost for tax collection since the tax is collected directly by authorised agents.
5. Time-Saving for Revenue Officers: The system saves time for revenue officers, allowing them to focus on other important duties.
   (Any 2 points @ 2.5 marks each = 5 marks)

Demerits of Withholding Tax

1. Negative Impact on Business Cash Flow: A high rate of withholding tax can adversely affect a business’s cash flow and operating performance.
2. Potential to Discourage Economic Effort: Withholding tax may discourage additional economic effort, such as part-time teaching or work, due to the perceived burden of high taxation.
3. Locking up of Capital: Businesses may face liquidity challenges due to the locking up of capital in the form of prepaid taxes.