Types of tax and corporate tax duties
A tax is money that the law makes people and companies pay to the government. The government spends it on roads, schools, hospitals and safety. Taxes are of two broad kinds:
- Direct tax: paid by the same person who bears it, such as corporate tax on a company's profit and income tax on a person.
- Indirect tax: collected from buyers by sellers, such as consumption tax (VAT or GST).
A company has a few duties: keep proper accounts, work out its taxable profit, file a return on time, pay the tax, and keep records for several years. A company is a legal person, so it pays tax in its own name, separate from its owners.
Corporate tax
Taxable profit is roughly sales minus allowed costs. Corporate tax = taxable profit x tax rate. The rate depends on the country and sometimes on company size. Some costs are not allowed in full, so the tax profit can differ from the accounting profit.
Filing and paying corporate tax
The steps are the same in most countries:
- The financial year ends and the accounts are closed.
- The company works out taxable profit and tax.
- It files a return, a form that shows the figures, before the deadline.
- It pays the tax by the due date. Many countries also ask for advance payments during the year.
If the company files late, pays late or reports false numbers, it faces interest and penalties, and serious cheating is a crime. If it paid too much, it can ask for a refund.
Filing and paying consumption tax
Consumption tax (called VAT or GST in many countries) is added to the price of goods and services. The buyer pays it, but the seller must hand it to the government.
- Output tax: tax the company collects on its sales.
- Input tax: tax the company paid on what it bought.
- Tax to pay = output tax - input tax.
Example at 10%: sales 100 give output tax 10. Supplies of 50 gave input tax 5. The company pays 10 - 5 = 5. This way, tax is paid only on the value the company adds. Companies file consumption tax returns regularly (monthly, quarterly or yearly) and pay by the due date. Very small sellers may be exempt in some countries.
Key formulas and definitions
- Profit = sales - costs
- Corporate tax = taxable profit x tax rate
- Price with tax = price x (1 + rate)
- Consumption tax to pay = output tax - input tax
- Key terms: direct tax, indirect tax, return, input tax, output tax
Worked examples
1. Sales are 200 and costs 140. The corporate tax rate is 25%. Find the tax.
Profit = 200 - 140 = 60. Tax = 60 x 25% = 15.
2. A phone costs 500 before a 10% consumption tax. What does the buyer pay?
Tax = 10% of 500 = 50. Buyer pays 500 + 50 = 550.
3. A shop collected 80 of consumption tax on sales and paid 55 on purchases. How much does it send to the government?
80 - 55 = 25.
4. A company files its tax return 20 days after the deadline. What can happen?
It may have to pay interest and a penalty on the unpaid tax, because the return and payment were late.
Common mistakes
- Mixing the two taxes: corporate tax is on profit, consumption tax is on sales.
- Thinking the shop pays consumption tax from its own pocket. The buyer pays; the shop only passes it on.
- Forgetting to subtract input tax when finding the tax to pay.
- Taking corporate tax on sales instead of on profit.