Taxation
Core concepts
Taxation questions test the structure of a tax system rather than memorized rates. Candidates must understand tax base, taxable person, taxable period, and the difference between direct taxes (income and profits taxed on the person earning them) and indirect taxes (consumption taxes collected by intermediaries). Know how progressive, proportional and regressive rate structures distribute burden, and understand equity (horizontal and vertical), neutrality, certainty, and efficiency as tax policy principles.
For income tax, master the computation chain: gross income, exemptions, deductions and allowances, taxable income, applied rates, credits, and final liability. Distinguish capital from revenue items, and know the treatment of depreciation or capital allowances, losses carried forward, and withholding obligations. For consumption taxes, understand input versus output tax, registration thresholds, exempt versus zero-rated supplies, and who bears the economic burden.
Traps
- Confusing zero-rated supplies (input tax recoverable) with exempt supplies (generally not).
- Deducting a capital purchase as a current expense instead of claiming allowances.
- Applying the marginal rate to total income instead of the correct bracket structure.
- Forgetting that withholding tax creates a compliance obligation for the payer.
- Mixing the legal incidence of a tax with its economic incidence.
Worked example / rule of thumb
Rule of thumb: build the ladder from gross to net. Example: taxable income is 60,000. Rates are 10 percent on the first 20,000 and 25 percent above that. Tax equals 2,000 plus 25 percent of 40,000, which is 10,000, giving 12,000 total. The marginal rate is 25 percent and the average rate is 20 percent. Never multiply 60,000 by 25 percent; that error overstates tax by 3,000 and is the most common bracket mistake.