Updated July 12, 2023
Definition of Tax Base
Tax base refers to the net amount of an asset or liability used for Tax reporting. It determines the amount which is applicable for tax purposes. It is the quantum of the amount over which tax will be applicable.
In short, it is important for the government of any country to project its revenue collection and every country makes efforts to expand which directly leads to more tax collection and more development in the country.
Explanation
The government requires a stream of revenues to run the economy and undertake welfare schemes leading to more prosperity and overall development. For this purpose, it collects taxes from its people. It defines the broad array of assets and income on which the government can apply the tax.
Thus by broadening its revenue stream and assets over which it can charge taxes, the government increases its Tax Base, which helps it to broaden its tax revenues by assessing the tax liabilities.
It can be computed as follows:
Tax Base = Total Tax Liability / Tax Rate
Let’s understand the same with a simple hypothetical example.
Aries is a small country with an average tax rate of 10% across all categories of Taxable sources of revenue. The government of Aries expects the total tax liability to be $20 million during the year 2019-20. Based on the above, the Tax Base turns out to be 200 million
- Tax Base = 20/10%
- Tax Base = 200 million.
Features
- It is fair and simple, ensuring that it is neither too much burdensome on the people nor at the same time sufficient for the government to discharge its responsibility and ensure growth by properly deploying resources most efficiently.
- This is easy to compute, and usually, a higher Tax Base is a sign of increasing tax revenues for the government. It is a sign of a nation’s economic strength and results in better tax compliance.
Examples
Let’s understand the same with the help of a practical example.
Cyrus is a small country in Europe. The government wishes to assess and perform an analytic study to understand how it can increase over the next three years by 50%. Below are the details of taxes the small country can form part along with tentative tax rates as well as projected tax collection. Based on the same, let us compute the current T. Base as well as the T. Base after three years.
Current Tax Base:
|
Tax Name |
Average Tax Rate
(A) |
Tax Liability (Amt in USD Mio)
(B) |
Tax Base in 2017 (C) = (B/A) |
| Income Tax | 12% | 1200 | 10000 |
| Sales Tax | 10% | 1399 | 13990 |
| Value Added Tax | 9% | 961 | 10678.9 |
| Excise Tax | 8% | 1247 | 15587.5 |
| Sin Tax | 15% | 4000 | 26666.7 |
| Service Tax | 13% | 3000 | 23076.9 |
| Total | 100000 | ||
Cyrus Government has decided to remove the Sin Tax and introduce a new Goods and Service Tax. It wishes to keep other tax and tax liability constant except for Income Tax and Service Tax and expects 100% growth in tax collection in the three years. Based on the same, the revised Projected Tax Base after three years is shown below:
|
Tax Name |
Average Tax Rate
(A) |
Tentative Tax Liability ( Amt in USD Mio) (B) |
Tax Base in 2020 (C) = (B/A) |
| Income Tax | 12% | 2400 | 20000 |
| Sales Tax | 10% | 1758 | 17580 |
| Value Added Tax | 9% | 961 | 10678.9 |
| Excise Tax | 8% | 1247 | 15587.5 |
| Goods and Service Tax | 10% | 4000 | 40000 |
| Service Tax | 13% | 6000 | 46153.8 |
| Total | 150000 | ||
Thus we can observe how Tax Base exercise help countries allocate their resources optimally and, at the same time, how proper strategy can be deployed to gain maximum tax collection.
Important Points
Assets and Liabilities reported by the business can have different carrying amounts, resulting in temporary differences. These temporary differences take the form of Deferred Tax Assets (DTA) or Deferred Tax Liabilities (DTL) and result in either a taxable amount or a deductible amount in the future.
Advantages of Tax Base
- It is directly proportional to the growth of a nation. Higher T. Base results in higher tax collection leading to higher growth in the ideal situation.
- A higher Tax Base usually leads to a lower average tax rate as a higher T. Base helps the government meet its tax revenue budgets even by lowering the overall tax rate.
- A proper estimate helps the government decide which activities will be kept outside of the purview of the Tax Base (For example, activities in certain areas for nation-building can be kept outside the Tax Base’s purview to encourage more people to undertake the same).
Disadvantages of Tax Base
- It implies more income where the individual is liable to pay tax resulting in lower disposable income.
- A country where it is narrow doesn’t generate enough Tax revenues, which results in overall lower growth. Also, such countries have to opt for a higher tax rate to cover up for limited revenue, leading to a comparative disadvantage for such nations.
- It covers only legitimate business and doesn’t cover the shadow economy, which is usually a good part of the economy, specifically in developing and underdeveloped nations.
- It does not consider deductions, which leads to lower tax collection and hampers revenue projections.
Conclusion
It is an important contributor to national growth. Also, it helps countries project their economic growth plans and budgeting exercises. A higher Tax Base is always advisable; however, it should be crafted in such a manner that it should not make the country less competitive and, at the same time, allow individuals to heap the benefit by lowering average tax rates on account of the higher T. Base.
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This is a guide to Tax Base. Here we discuss the definition and examples along with its advantages and disadvantages. You may also have a look at the following articles to learn more –
