Chapter-1Introduction to Tax Accounting (chp-1 (1and 16)- Chp-2

(1,2 and 3)

Purpose of Tax Accounting:

The primary purpose of tax accounting is to determine taxable income, preparation of federal & state income tax returns, & planning of operations along lines that will hold

As income tax (IT) rates have gone up & the determination of Taxable income has become more complex, both internal accountants & independent public accountants have devoted more time to problems of taxation. Although many companies rely on CPA firms for tax planning & the preparation of IT returns, larger companies also maintain their own tax departments.

Meaning of tax

Tax is a compulsory payment to the government by a tax payer

Tax shall means any tax which must be paid by virtue (by force or authority) of this Law & shall include any fine, interest or any other burden stipulated (terms of agreement or contract) by virtue of this Law with the exception of any penalty (punishment).

All countries in the world charge taxes of some sort and there is no country in the world which does not charge any tax

Types of taxes

There are two types of taxes, they are:-

i) Direct Tax ( Income Tax, Gift tax, Wealth tax )Ii) Indirect Tax ( sales, excise, custom taxes, Excise tax etc.)Direct tax:Taxation, the effect of which is intended to be borne by the person or organization that pays it. Examples are Income tax, corporation tax etc. In other words direct tax reduces the income directly.

Indirect Tax :Taxation that is intended to be borne by persons or organizations other than those who pay the tax. The principal indirect tax is value added tax VAT, which is paid by traders as goods & services enter into the chain of production, but which is ultimately borne by the consumer of the goods & services. One of the advantages of indirect taxes is that they can be collected from few sources while their economic effects can be wide spread.

Types of taxesDirect taxes:

1.Income tax: The tax chargeable on the taxable income of a person. 2.Gift tax: The tax charged on the donor who donates any gift specified in the act, to any other person. 3.Wealth tax: The tax charged on the individual whose wealth crosses a limit specified in the act.

Indirect taxes:

1.Sales taxes: The tax charged on the purchases made by the customers2.Excise taxes: The tax charged on the goods and services produced by manufacturers within the territory of a country.3.Customs taxes: The tax charged on the goods and services imported from other countries.4.VAT – Value Added Tax – This tax is like sales tax.

Objectives of taxes1. To raise ( collect ) money to pay for government spending :-

government needs money for providing different goods & services to people such as education, medical, housing etc. Taxation is the main source of collecting money for such purpose.

2. To discourage people from buying harmful goods :- government look after the welfare of the people. Hence many countries impose taxes to discourage people from consuming those goods which are harmful to their health for example alcohol, cigarettes etc.

3. To influence the level of total demand in the economy :- when government wants to increase demand in the economy, it can reduce taxes, so the goods are cheaper and more goods are purchased.

4. To redistribute income from the rich to the poor :- when rich are taxed, this money is collected by the government and spend on services such as education, medical, housing etc. for the welfare of the general public of the country.

Sources of Government income

A governments main source of income is usually in the form of taxation on its various activities, such as-

1. Importing,& exporting,

2. Income tax, both personal and corporate.

3. Sales tax.

4. Charging for services, such as water. electricity, municipality services, public transport, medical services.

5. Borrowings/ loans,

6. Selling state owned assets, gold, & land.

The government spends this money on a variety of items.

Government expenditures

The government needs money to pay public expenditures such as:

1. Construction of roads, rail and other public transport system.

2. Construction of bridges, airports, ports.

3. Education of people

4. Health services to its people

5. Housing facilities for the poor people

6. Defense

7. Development of industrial & agriculture sector

8. Water, electricity services, telephone and telecommunication

9. Municipality services

10. Maintenance of law and order.

Oman Income tax Law

There is no personal income tax in Sultanate of Oman. However, the government of Oman charges income tax on joint stock companies:•This law shall be called the Law of Income Tax on Companies NO.47/1981 and its Amendments. (change for the better a law, bill or motion).•This law shall have effect in all parts of the Sultanate of Oman.•Without prejudice (a judgment or opinion formed without due

examination of facts) to the provisions of Paragraph (3) of the Fourth Schedule to this law, this law shall have effect as from 1st January 1981, & shall apply to income chargeable to tax for the tax year ending on 31st December 1980 & the following tax years.

Fourth schedule in Oman Income tax law

The fourth schedule of Oman Income tax law says “ Income chargeable to tax & the procedures of Assessment in relation to which have not been completed at the date on which this Law comes into effect shall be subject to the provisions of this Law.”

Important definitions:

What does “The Sultan” mean in Law?

“The Sultan” shall mean His Majesty the Sultan of Oman and his Successors.

What does “Accounting Period” shall mean?

The Accounting Period means the period for which the company accounts are prepared.

What is “Permanent Establishment?”

Permanent Establishment shall mean the fixed place of business. It include the following:

a) A place of Sale; b) A place of Management; c) Branches; d) Offices; e) Factories; f) Workshops; g) Mines or any place of natural resources; h) A building site, place of construction, Assembly plant.

What is Not included in Permanent Establishment?

The expression Permanent Establishment shall Not include the following:

a) The mere use of facility for the purpose of storage, display or delivery of goods or products of the company.

b) The preservation of goods or product in a store for the purpose of storage, display or delivery.

c) The preservation in a store of goods or products of the company for the purpose of their manufacture alone by means of another company.

d) Storage of goods or products of the company in a fixed place for a business which does not by its nature intend to make profit, it is only used for collecting information or scientific studies.

What does “Petroleum” mean?

Petroleum shall mean any crude oil, natural gas asphalt (By product) or petroleum derivatives or additives.

Who is The Director or Officer Responsible?• The Director or Officer Responsible with relation to any

Company shall mean, a member of the Board of Director, an officer, manager or any other person

who has received a notification from the Secretary General to represent the company.

What do you mean by “Income Chargeable to Tax”?

The Income Chargeable to Tax shall mean the gross sum of revenue Less allowable deduction.

What is the meaning of “The Tax Year”?

The Tax Year shall mean the period of Twelve months commencing from the 1st day of January & ending on the 31st December following.

ARTICLE (3) Management

Who is responsible for the Implementation of Income Tax Law?

The Secretary General shall be responsible for the implementing this Law. He shall be responsible also for

control & supervision on director general, directors & other employees of Secretariat General for the purpose of implementing this Law.

Does Secretary General authorize other person to assume any of his functions?

The Secretary General may authorize director general, directors or other employees of his Secretariat to assume any of his functions specified in the Law, or to carry out specific assignment entrusted originally to the Secretary General for the purpose of implementing this Law.

TAX COMMITTEE

What is the formation of Tax Committee?

The Committee shall be formed of a President & Three(3) Members, Technical Expert & Secretary, appointed by a decision from the Minister.

What are the powers of the committee?

The Committee shall be empowered to view the appeals against the Secretary General’s decisions in implementing the provision of Article 46 (Appeals submitted to the Tax Committee) of this law, in addition to other functions as stipulated in this law.

How the committee works?

Committee operation system shall be issued by a decision from the Minister & committee sessions shall be confidential.

Article-4

What are the Principle Jurisdiction of the Secretary General?

The Principle Jurisdiction of the Secretary General shall be to:

a) Take necessary action for tax assessment or exemption as specified by the law.

b) Take necessary procedures to collect taxes, duties & other amounts due to the administrative units of the government.

c) The departments listed in the organizational structure of the Ministry of Finance shall be under the Secretary General. The Departments are as follows:

1.Dept. of Investigation & Assessment; 2.Directorate General of Collection; 3.Directorate General of Tax Survey & Administration.

Article (5)

Who is responsible for the Confidentiality of documents used as evidence in the Law?

Every employee who, while performing his job, have an affair in implementing this law or settling its dispute is bound to observe the confidentiality of the trade in respect of documents, instruments & data related to any company, also all the confidential instructions came to his knowledge while performing his duties.

What shall not deemed to be breaches of confidentiality?

The following shall not be deemed to be breaches of confidentiality:-

a) The giving of confidential statements demanded in the criminal court or in the courts connected with this law.