Taxation- Copy.ppt

Taxation
The discussion about public finance, public expenditure and public revenue are
centric to the tax because most of the government expenditure or major sources
of government revenue are raised from tax.
French word ‘taxe’ and latin word ‘taxare’ which means ‘to charge’.
“Taxes are compulsory payment to government without expectation of
direct return in benefit to the tax payer.” P. E. Taylor
Taxation is the process of tax collection. It covers all of the following: passing
of the law by the parliament, making of rules by the Government, entire set of
people appointed as tax commissioners, assessment; the appellate authorities &
so on.
1

Taxation
Taxation is Inherent power of the sovereign. It is exercised through
the legislature. It is for the purpose of raising revenues to carry out
the legitimate objectives of the government. It is to impose
burdens upon the subject and object within its jurisdiction.
A tax is a compulsory charge or payment imposed by government
on individuals or corporations. The persons who are taxed have to
pay the taxes irrespective of any corresponding return from the
goods or services by the government.
2

Taxation
Taxation is a system that the government uses to collect taxes
from people and businesses, based on their income, assets, or
transaction values. The primary purpose of taxation is to raise
revenue for the government, although the government does use
taxes to promote beneficial activities, such as starting a business or
getting an education, or to limit undesirable behavior, such as
smoking and drinking alcoholic beverages.
Taxpayers do not like to take the time and effort to comply with
the tax rules nor do they want to pay taxes. Most people agree that
taxes should impose as small a cost on society as possible.
3

Classification of taxation
A. Classification on the basis of number of taxes:
1. Single tax: When the tax system of a country incorporates only one tax,
it is called single tax. In ancient times tax was levied on person as poll or
head tax.
2. Multiple tax: When the tax comprises different types of taxes it is
called multiple tax. At present, all the countries in the world follow
multiple tax system.
B. Classification on the basis of impact and incidence
1. Direct tax: Direct taxes are those taxes which are paid entirely by those
persons on whom they are imposed. The burden cannot be shifted to
others- such as income tax, land revenue tax etc.
2. Indirect taxes: Indirect taxes are those taxes which are imposed on
sales or purchase of only goods or services. Here the burden is ultimately
shifted to others. Such as VAT, Custom duty etc.
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C. Classification on the basis of structure of tax rate
1. Proportional tax: A professional tax is one in which, whatever the
size of income, the rates of taxation remains constants. Here the same
percentage is changed on all taxpayer. For example, tax on TK.100000 is
10% and TK. 500000 is also 10%. Here in absolute form tax has increased
in proportion to rate of increase of income.
2. Progressive tax: Under this system, the rate of taxation increases as
the taxable income increases. The principle of progressive tax is “higher
the income, higher the rate. For example, tax on total income of
TK.100000 is 10% but on Tk. 500000 is 15%.
3. Regressive tax: A tax is regressive when its burden falls heavily on the
poor than the rich, Since the tax rate decreases as the tax base (income)
increases. This is just opposite of progressive tax. Sales tax is regressive
tax. If two individuals spend the same amount on a given product, they
will both pay same sales tax, regardless of whether one earns more the
other one.
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4. Digressive tax: Taxes which are mildly progressive, hence not very steep
so that higher income do not made a due sacrifice, such taxes on the basis
of equity are called digressive. In digressive taxation, a tax may be slowly
progressive up to a certain limit, after that it may be changed at a flat rate.
In Bangladesh, this system is followed.
The tax rate for the assessment year 2020-21
Individual Tax- the tax-free income threshold of male taxpayers is Tk. 3 lakh
and the tax-free income threshold of female taxpayers and taxpayers above 65
years of age is Tk. 3 lakh and 50 thousand. the minimum tax rate for individuals
is 5 percent, and the maximum tax rate for individuals is 25 percent. The
following table presents the tax rate for the assessment year 2020-21
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Total income sales Tax rate
On first TK. 300000 Nil
On next TK. 100000 5%
On next TK. 300000 10%
On next Tk. 400000 15%
On next Tk. 500000 20%
Rest of the amount 25%

D. Classification on the basis of subject matter
1. Personal Tax: This tax is levied on the basis of the personal tax paying
capability such as income tax.
2. In rem tax: This tax is levied on activities or objects like sales tax,
wealth tax etc.
E. Classification on the basis of tax base:
1. Income Tax: It is a tax which is changed on the basis of the income of
a person or entity.
2. Wealth Tax: Here tax is changed on the basis of the value of the
financial asset like shares, securities, or non-financial assets like building
premises land etc.
3. Value added tax: Hear tax is changed on the basis of the value
addition in a commodity or services.
4. Expenditure tax: Here tax is changed on the basis of the expenditure
like purchase tax, sales tax etc.
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F. Classification according to taxing authority:
1. Central tax: Tax levied by the central government is called as Central tax.
2. Local tax: Tax levied by the local authorities like City corporation,
Municipality, Union Parishad etc.
Principles/ Canon of taxation
Adam Smith, the father of Economy has laid down four principles/cannons of
taxation these principles are still considered to be the stating point of sound
public finance.
1. Canon of equity or ability: By equality we do not mean that people
should pay equal amount by way of taxes to the government. By equality is
mean equality of sacrifice, that is people should pay taxes in proportion to
their income.
2. Canon of certainty: The Canon of certainty implies that there should be
certainty with regard to the amount which tax payers is called upon to pay
during the financial year. The tax payer is definite and certain about the
amount of the tax and it is time of payment, he can adjust his income to his
expenditure.
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3. Canon of convenience: It means that the text should be levied at the time
and manner which is most convenient for the contributor to pay it. For
example, if the tax on agriculture land is collected in instalments after the
crop is harvested. It will be very convenient for the agriculturist is to pay it.
4. Canon of economy: The Canon of economy implies that the expenses of
collection of taxes should not be excessive. They should be kept as little as
possible consistent with administration efficiency.
Other principle/Canon:
1. Productivity: Indicates that a tax when levied should produce sufficient
revenue to the government.
2. Elasticity: The tax system should be fairly elastic so that if at any time govt.
is in need of more funds it should be increase its financial resources without
incurring any additional cost of collection. Income tax, railway fares, postal
rates are very good example of elastic tax.
3. Simplicity: Tax system should be fairly simple, plain and intelligible to the
taxpayer. If it is complicated and difficult to understand then it will lead to
oppression and corruption.
4. Diversity: The system of taxation should include a large number of taxes
which are economical. The govt. should collect revenue from its citizen by
levying direct and indirect taxes. 9

10
Characteristics of a good tax system:
A central issue in public economics is the appropriate design of a good tax
system. It is a system that designs and implements a tax policy that reduces
inefficiency and distortion in the market under given economic constraints.
Such a system is usually viewed as balancing the various desirable attributes of
taxation. A good taxation/taxation system has the following principles:
 Certainty
 Equity
 Convenience
 Administrative efficiency
 Economic principle
 Simplicity
 Acceptability

Effects of taxation on the people
To palliate the effects of taxation on the people, tax policy at least nominally
strives to achieve two objectives: Efficiency and Equity.
Tax efficiency
Tax efficiency minimizes the cost of complying with the tax code by reducing
its administrative burden and by minimizing any distortions in the economy
caused by the tax.
Reducing the administrative burden not only benefits the taxpayers but also the
economy since tax collection is not an objective of tax policy, but simply a
requirement.
Another objective of tax policy that is little heeded is that burden losses should
be minimized. Although the cost of complying with the tax rules does generate
some burden losses, most burden losses are incurred by the actual tax itself,
especially when it is assessed on working income.
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Another often stated objective of tax policy is that taxes should not
distort economic decisions, which occurs when people decide to
do something differently because of the tax.
For instance, high taxes on working income discourages work
because it raises the price of labor for employers and decreases the
disposable income for workers. That higher prices reduces demand
and lower prices decreases supply are well-established economic
principles, yet working income is taxed more than investment
income.
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Taxation
Taxation Equity
 Taxation equity is the principle that taxes should be fair. However,
there are several criteria for determining what is fair.
 The benefits principle states that people should pay taxes based on
the benefits that they receive from government services.
For instance, excise taxes on gasoline are used to build roads and
bridges.
 However, taxes on income and investments are based on the ability to
pay.
 The ability-to-pay principle can be classified as vertical equity and
horizontal equity.
 Vertical equity is the principle that people with higher incomes
should pay more taxes, such as the provision for the increasing
marginal tax rates on higher income.
 Horizontal equity is the principle that people with higher necessary
expenses should pay less tax than someone else with equal income
but without the expenses.
13

Taxation
The difficulty in formulating tax policy is balancing the often
conflicting goals of efficiency and equity.
The economists have put forward many theories of taxation at
different times to guide the state as to how efficiency and/or equity in
taxation can be achieved.
A taxation theory may be derived on the assumption that there
need not be any relationship between tax paid and benefits
received from state activities.
There are two theories, namely,
 The expediency theory
 The socio-political theory
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Taxation
A taxation theory may be based on a link between tax liability
and state activities. It would assume that the state should
charge the members of the society for the services provided by
it.
This reasoning, on the one hand, justifies imposition of taxes for
financing state activities and on the other, by inferences, provides a
basis, for apportioning the tax burden between members of society.
This logic therefore, yield two theories, namely,
 Benefit received theory
 Cost-of-service theory
 The final theory of taxation is the ability to pay theory.
15

Taxation
The expediency theory
This theory asserts that every tax proposal must pass the test of
practicability. It must be the only consideration weighing with the
authorities in choosing a tax proposal.
Economic and social objectives of the state as also the effects of a
tax system should be treated as irrelevant.
This proposition has a truth in it, since it is useless to have a tax
which cannot be levied and collected efficiently. There are
pressures from economic, social and political groups. Every group
tries to protect and promote its own interests and authorities are
often forced to reshape tax structure to accommodate these
pressures.
16

Taxation
The expediency theory ………
In addition, the administrative set up may not be efficient to collect
the tax at a reasonable cost of collection. Taxation provides a
powerful set of policy tools to the authorities and should be
effectively used for remedying economic and social ills of the
society such as income inequalities, regional disparities,
unemployment, cyclical fluctuations and so on.
17

Taxation
The socio-political theory
Adolph Wagner advocated that social and political objectives should be
the deciding factors in choosing taxes. Wagner did not believe in
individualist approach to a problem. He wanted that each economic
problem should be looked at in its social and political context and an
appropriate solution found thereof.
The society consisted of individuals, but was more than the sum total of
its individual members. It had an existence and entity of its own which
needed preservation and taking care of.
Accordingly, a tax system should not be designed to serve individual
members of the society, but should be used to cure the ills of society as a
whole.
Wagner, in other words, was advocating a modern welfare approach in
evolving and adopting a tax policy. He was specifically in favor of using
taxation for reducing income inequalities.
18

Taxation
The socio-political theory……….
He maintained that private property and inheritance were the result
of state policies and not because of any God-given rights. The
State, therefore, had the right to control the ownership of property
and its inheritance in the interests of the society as a whole.
Wagner’s ideas, though much criticized at that time, are now the
focal point of fiscal policies of modern state.
19

Taxation
The benefits-received theory
This theory proceeds on the assumption that there is basically an
exchange or contractual relationship between tax-payers and the state.
This theory explains that every citizen should be called upon to pay taxes
in proportion to the benefits derived by him from services provided by
the Government. It is implied that the state provides certain facilities to
its civilians who should, therefore, contribute to the cost or value of
these facilities in proportion to benefits received by them.
The more the benefit a citizen derives, the more taxes he should bear, is
the main assumption of the theory. The principle justifies the payment of
taxes. It also measures benefits received by the individuals in the case of
certain special taxes such as petrol tax, betterment tax etc.
20

Taxation
The benefits-received theory…………
The theory has been subjected to various criticisms.
(1) Firstly. the assumption that the tax should be paid by an
individual in proportion to benefits conferred by the State on
that individual, is quite unrealistic because the benefits derived
cannot be correctly measured in terms of money. Benefit is
purely a subjective matter and there is no scientific way to
measure the magnitude of benefit and its money value.
(2) Secondly. if benefits accrued to an individual is the basis of
taxation, the poor must pay higher taxes because in a welfare
State the poor get more benefits than the rich from the
expenditure of the Government. This is clearly unjust and as
such an unacceptable proposition.
21

Taxation
(3) Thirdly. it is also very difficult to determine under this theory
what proportion of the general benefits accrue to particular
individuals. Government is for civilized existence and there is,
therefore, no basis for valuing the services which the State renders.
(4) Fourthly. most of the services provided by the State are
indivisible and beneficiaries are unidentified. For example, it is not
possible to divide the benefits of national defense, etc.
(5) Fifthly. certain benefits accrue only to definite persons and in
definite proportion. If this principle is followed, the whole of the
benefit, they should return to the State as taxes. For example;
pension paid to retired servants, definite and clear enough and
therefore, they should offer the whole of their pension as taxes.
22

Taxation
(6) Finally, the equitable distribution of wealth, the main
objective of most of the modern Governments, will be
defeated if this principle is followed.
The above description makes it amply clear that the benefit
principle cannot ensure justice in the distribution of burden of
taxes among different sections of the society.
23

Taxation
The cost of service theory
In a democratic country, the policies of the Government should be
based on the principle of justice otherwise the people will protest
against the unjust policies of the Government. The taxation policy
of the Government should be based on justice and equity. How
justice can be achieved is a very crucial element of taxation
system.
This theory implies that the Government should tax the citizens
according to the cost of service rendered by it. The Government
renders certain services to citizens and the cost of such services
should be collectively met by the citizens. The tax, an individual
should bear, must be equal to the cost of benefit be receives.
24

Taxation
The cost of service theory………………
Criticisms of Cost of Service Theory or Taxation: The theory is also
subjected to several criticisms by many economists-
Firstly, finding out total cost of services rendered by the Government is very
difficult and therefore, the question of distribution of total cost among citizens is
not so easy to solve.
Secondly. if we believe that the total cost of services can be determined, the
next difficulty is how to divide the cost of the services among individuals.
Thirdly, if this theory is followed in the modern welfare state, the poorer will
have to pay more taxes because they enjoy more benefits. Hence, it is opposite
to the principle of justice.
Fourthly and Finally, the cost of the services rendered depends very much on
the efficiency of the administrator. If the administrator is efficient, the cost
would be lower and if the administrator is inefficient, the cost of the benefit
would be higher.
25

Taxation
Ability to pay theory
This approach considers tax liability in its true form-compulsory
payment to the state without quid pro quo (a thing given in return
for sth else). It does not assume any commercial or semi-
commercial relationship between the state and the citizens.
According to this theory, a citizen is to pay taxes just because he
can and his relative share in the total tax is to be determined by his
relative paying capacity.
This doctrine has been in vogue for at least as long as the benefits
theory. A good account of its history is found in Seligman.
This theory was bound to be supported by socialist thinkers
because of its conformity with the ideas and concepts of justice
and equity. However, the doctrine received an equally strong
support from non-socialist thinkers also and became a part of the
theory of welfare economics. 26

Taxation
Ability to pay theory…..
The basic tenet of this theory is that the burden of taxation should
be shared by the members of society on the principles of justice
and equity and that these principles necessitates that the tax burden
is apportioned according to their relative ability to pay.
Some disadvantages of the ability-to-pay principle are the
difficulty in defining “ability to-pay,” the adoption of programs
whose total costs exceed total benefits, and the reduction of work
incentives.
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