3.1. Types of Taxes

Theory

Key Terms & Definitions

Income Tax — A direct tax on individual earnings, including salaries, self-employment income, rental income, dividends, and capital gains.

Corporate Tax — A tax on a business’s net taxable profits (Revenue – Allowable Expenses). Applies to companies and, in some jurisdictions, partnerships.

VAT (Value Added Tax) — An indirect multi-stage consumption tax applied at each step of the supply chain, with input VAT credits available to businesses.

Sales Tax — A consumption tax collected only at the final point of sale (common in the US), unlike VAT which applies at every stage.

Consumption Tax — A broader term covering taxes applied to goods and services, including VAT, GST, and sales tax.

Progressive Tax — A tax rate that increases as income increases (e.g., UK, Germany).

Proportional / Flat Tax — A single fixed tax rate regardless of income level (e.g., Russia, some GCC countries).

Regressive Tax — A system where lower-income individuals bear a relatively higher burden—often linked to consumption taxes like VAT.

Withholding Tax (PAYE) — Tax deducted at source, typically through payroll before wages are paid to employees.

Allowable Expenses — Business expenses that can be deducted from revenue to calculate taxable profit (salaries, rent, depreciation, interest).

Tax Authorities — Government bodies responsible for collecting taxes and enforcing compliance (e.g., IRS, HMRC, FTA).

Zero-Rated Goods — Taxed at zero percent, but still allowing businesses to claim input VAT.