1. Structural Design in Income tax system and the place of business
taxation
By: Alemu Taye (Asst. Prof.)
Debre Markos University
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2. Two theoretical models exist for the structure of the income tax
A Schedular Income Tax
Sources of income are categorized in different schedules so that
distinct taxes are imposed on each categories.
Gross income, deductible expenses, exempted items and the rates
are determined separately.
Different procedures of reporting, assessment, and collection are
applied to each category.
Its good to treat different items differently but
It faces problem of characterization: more difficult/ costly to
administer.
Differences in rates/ deductibles provide an incentive for tax
planning and restructuring.
Difficult to implement the aims of progressive income taxation b/c
the right ability to pay is indicated by an increase in total economic
capacity.
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3. A Global Income Tax:
• Aggregate the income, whatever its nature, regardless of the
multiplicity of sources, and permit deductions without regard to the
type of income in connection with which they are incurred.
• It reject category of income.
• Its good to implement progressiveness but it requires an advanced/
a strong tax administration with the capacity to aggregate and
compute the income of the individual as a whole.
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4. Composite systems:
◦ The two theoretical models represent the ends of a spectrum- the choice of
one remains a theoretical/ ideal only and, in practice, most income tax
systems lie on the Intermediate Structures.
In may jurisdictions, the elements of both global and schedular systems
are combined, although one type is predominant.
E.g. Countries (such as US, Canada and Australia) have global income
tax structure but they have many schedular features and Countries (such
as European countries and Japan) have schedular structures with some
global elements.
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5. Ethiopian income tax design has been schedular since the very beginning
◦ It begin with three schedules in 1944 and it has expanded and shrunk at
different times.
In addition to the schedules of the main income tax law, the system
recognized separate/autonomous income tax systems for agriculture,
petroleum and mining sectors.
Currently, as per art. 8 of the ITP, there are five schedules
Schedule A (employment Income)
Schedule B (Rental Income)
Schedule C (Business and Professional Profits)
Schedule D (miscellaneous- 7 income sources)
Schedule E (Exempted sources)
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6. Although the schedules are generally taken to be simple to administer,
the system is criticized on the issues of overlapping tax bases,
equitability (difference in tax burden), susceptible to clever tax
planning (minimize or even eliminate tax liability), and are
unresponsive to individual differences of taxpayers: married, single,
family, medical situations, etc.
The schedules sometimes overlap and creates problems of
characterization. For example,
◦ Schedule A (employment) may overlap with Schedule C (independent contract).
◦ Schedule A (employment) may also overlap with schedule D (royalties).
◦ Schedule B (rental of buildings) may sometimes overlap with Schedule C (rental of
buildings as business- real estate) or D (casual rental of property).
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7. Due to the rigidity of the schedular system, some income sources may
fall through the cracks.
◦ Tax bases left uncovered under Proclamation No. 286/2002
Income from life insurance policies,
Interest outside business contexts,
Income from partnerships, etc.
Windfalls (e.g. sudden devaluation of money)
◦ Tax bases left uncovered under Proclamation No. 979/2016
Imputed Income from Owner-Occupied Housing
Debt Cancellation
Welfare payments such as unemployment payments, old-age pensions
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8. Tax Rates and Income Brackets are made to be uniform (for the
interests of Equity), yet there are differences across the schedules and
subtle differences persist.
◦ Schedule D (different withholding tax rates)
◦ Agriculture (still varies from region to region)
The rules of exclusions, deductions and exemptions are not uniform
across the schedules.
◦ Schedule A applies exclusions instead/in lieu of deductions.
◦ The exemptions under Schedule A are not applicable for Schedule B or Schedule C
or Schedule D taxpayers.
◦ Deductions are common for Schedule B and C taxpayers, but there are
unaccountable differences.
◦ Schedule B has standard deductions unlike Schedule C.
◦ Some expenses which are deductible under Schedule C may not be deductible under
Schedule B- some expenses may be denied as deduction solely because the
taxpayer is a schedule B taxpayer.
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9. Even though assessment methods are not strictly different along the schedules, there are
differences in assessment methods. For example,
◦ Schedule A: primarily withholding
◦ Schedule B: primarily self-assessment
◦ Schedule C: primarily self-assessment
◦ Schedule D: primarily withholding
◦ Schedule B and C (Small taxpayers): Presumptive income taxation/ standard assessment
There are significant differences in the accounting periods/tax periods of the schedules.
◦ Schedule A – monthly accounting and simple PAYE;
◦ Schedule B – annual accounting;
◦ Schedule C – annual accounting;
◦ Schedule D- event based/realization.
The methods of accounting may also be different.
◦ Schedule A and D taxpayers are generally required to account on cash basis;
◦ Schedule B and C taxpayers may use either cash or accrual basis accounting.
These differences may lead to significant differences in tax burdens among the different
categories.
◦ Schedule A taxpayers may be subject to higher tax burdens due to the adoption of monthly accounting
systems combined with PAYE (Pay-As-You-Earn).
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