public revenue resources are taxes price.pptx

The government derives revenue in different ways from the public. The common methods of raising the resources are taxes, prices, fees, fines and penalties, gifts , grants, special assessment. Generally, tax revenue and non-tax revenue are considered as the sources of government revenue.

1. Chapter 2 MPA PUBLIC REVENUE 1

2. Contents Concept of Public Revenue Canons of Taxation Principles of Taxation (Benefits principle and Ability-to-pay principle) Characteristics of and Effective Tax System Revenue Administration 2

3. What are public revenues? What is Revenue? The term Public Revenue includes all income and receipts, regardless of source and nature, which the government obtains during any given period of time. This would include amount received by the entity, and all taxes, fees, fines, penalties, gifts, donations, etc.. 3

4. Concept Governments must have funds, or revenue, to pay for their activities. Governments generate some revenue by charging fees for the services they provide, such as entrance fees at national parks or tolls for using a highway. However, most government revenue comes from taxes, such as income taxes, capital taxes, and sales and excise taxes. 4

5. Concept… An important source of tax revenue in most countries is the income or payroll tax, also known as the personal income tax. Income taxes are imposed on labor or activities that generate income, such as wages or salaries. In the United States , income taxes account for about half of the total revenue of local, state, and federal governments combined. 5

6. Concept… Another important source of government revenue is the capital tax. Capital includes items or facilities that generate profits, such as factories, business machinery, and real estate. Some types of capital taxes are known as “profits” taxes. One kind of capital tax used by the government is the corporate income tax. A property tax is a capital tax used by state and local governments. Property taxes are levied on items such as houses or boats. 6

7. Concept… Sales and excise taxes are also a major source of government tax revenue. Many state and local governments levy a sales tax on the purchase of certain items. Consumers usually pay a percentage of the sales price as the tax. Excise taxes are used by all levels of government. An excise tax is levied on a specific product, such as alcohol, cigarettes, or gasoline. 7

8. Concept.. In many European, South American, and Asian countries, a value-added tax (VAT) provides significant revenue. The VAT is levied on the value added to a product during production as its components are assembled into final goods. For example, a clothing manufacturer might spend $500 on fabric, thread, zippers, and other goods required to make dresses. The manufacturer then adds $1000 to cover the costs of labor and the use of machines and equipment and sells the dresses for a total of $1500. The value-added tax is paid on this $1000. 8

9. Public revenue vs Public receipts Public revenue includes that income which is not subject to repayment by the government. Public receipts include all the income of the government including public borrowing and issue of new currency. In this way public revenue is a part of public receipts. Public Receipts = Public revenue + Public borrowing + issue of new currency 9

10. Fiscal year Total Revenue Tax Revenue (Rs. & %) Non-tax Revenue 1999/00 4289.37 3315.21 77.29 974.16 22.71 2000/01 4889.39 3886.51 79.49 1002.88 20.51 2001/02 5044.56 3933.06 77.97 1111.50 22.03 2002/03 5622.97 4258.70 75.74 1364.27 24.26 2003/04 6233.10 4817.50 77.29 1415.80 22.71 2004/05 7012.27 5410.47 77.16 1601.80 22.84 2005/06 7228.19 5743.04 79.45 1485.15 20.55 2006/07 8771.21 7112.67 81.09 1658.54 18.91 2007/08 10762.25 8515.55 79.12 2246.70 20.88 2008/09 14347.45 11705.19 81.58 2642.26 18.42 2009/10 17799.09 15978.53 89.77 1820.56 10.23 2010/11 19837.59 17722.72 89.34 2114.87 10.66 2011/12 24437.29 21172.18 86.64 3265.12 13.36 2012/13 29602.11 25921.49 87.57 3680.62 12.43 2013/14 36292.36 31243.99 86.06 5048.37 13.94 2014/15 39350.66 35350.57 89.86 4000.08 10.14 2015/16* 46042.55 41242.44 89.58 4800.11 10.42 10

11. Taxation The most important source of revenue of the government is taxes. The act of levying taxes is called taxation. 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. The taxes may be imposed on the income and wealth of persons or corporations and the rate of taxes may vary. 11

12. Objectives of Taxes Raising Revenue Regulation of Consumption and Production Encouraging Domestic Industries Stimulating Investment Reducing Income Inequalities Promoting Economic Growth Development of Backward Regions Ensuring Price Stability 12

13. Canons of Taxation The canons of taxation were first presented by Adam Smith in his famous book ‘The Wealth of Nations’(1776). These canons of taxation define numerous rules and principles upon which a good taxation system should be built. By canons of taxation we simply mean the characteristics or qualities which a good tax system should possess. In fact, canons of taxation are related to the administrative part of a tax. Although these canons of taxation were presented a very long time ago, they are still used as the foundations on the principles of taxation by the modern governments while imposing and collecting taxes. . 13

14. Canons of Taxation Adam Smith originally presented the four canons of taxation. The rest were developed later: Canon of Equality Canon of Certainty Canon of Convenience Canon of Economy Canon of Productivity Canon of Simplicity Canon of Diversity Canon of Elasticity Canon of Flexibility 14

15. Canon of Equality Canon of equality states that the burden of taxation must be distributed equally or equitably among the taxpayers. However, this sort of equality robs of justice because not all taxpayers have the same ability to pay taxes. Rich people are capable of paying more taxes than poor people. Thus, justice demands that a person having greater ability to pay must pay large taxes If everyone is asked to pay taxes according to his ability, then sacrifices of all taxpayers become equal. This is the essence of canon of equality (of sacrifice). To establish equality in sacrifice, taxes are to be imposed in accordance with the principle of ability to pay. In view of this, canon of equality and canon of ability are the two sides of the same coin. 15

16. Canon of Certainty According to this canon, the tax which each individual is required to pay should be certain and not arbitrary. The time of payment, the manner of payment and the amount to be paid should be clear to every tax payer. It would protect the tax payer from the exploitation of tax authorities in any way. It will enable the tax payer to manage his income and expenditure. The application of this principle is beneficial both to the government as well as to the tax payer. Therefore, It must be certain to the taxpayer as well as to the tax-levying authority. 16

17. Canon of Convenience According to this canon, the mode and timings of tax payment should be convenient to the tax payer. Taxes should be imposed in such a manner and at the time which is most convenient for the tax payer. The tax payer forgoes his purchasing power and makes a sacrifice at the time of payment of tax hence the Government should see that the tax payer suffers no inconvenience. For example, GON collects the income tax at the time when they receive their salaries. So it is also known as ‘the pay as you earn method’. 17

18. Canon of Economy Every tax has a cost of collection. The canon of economy implies that the cost of tax collection should be minimum. There should not be any leakage in the way. In this way, a large amount of the collections will go directly to the treasury, and therefore, will be spent in the government projects for the welfare of the economy, country and the people. If the canon of economy isn’t applied and the overall cost of collecting taxes is unreasonably high, the collected amount will not be sufficient at the end. 18

19. Canon of Productivity It is better to have fewer taxes with large revenues, rather than more taxes with lesser amounts of revenue. It is always considered better to impose the only taxes that are able to produce larger returns. More taxes tend to create panic, chaos and confusion among the taxpayers and it is also against the canon of certainty and convenience to some extent. Tax yield is important and consider the yield before proposing any new tax. If a tax yields poor income, it cannot be said to be a good and productive tax 19

20. Canon of Elasticity An ideal system of taxation should consist of those types of taxes that can easily be adjusted. Taxes, which can be increased or decreased, according to the demand of the revenue, are considered ideal for the system. An example of such a tax can be the income tax, which is considered very much ideal in accordance with the canon of elasticity. This example can also be taken in accordance with the canon of equality. Flexible taxes are more suited for bringing social equality and achieving equal distribution of wealth. Since they are elastic and easily adjustable, many government objectives can be achieved through them. 20

21. Canon of Simplicity The tax should not be complicated in its nature. It should be so simple that tax payer can understand its complications without the help of any expert. The system of taxation should be made as simple as possible. The entire process should be simple, non-technical and straightforward. Along with the canon of certainty, where the amount, time duration and manner of payment is made certain, the canon of simplicity avoids cases of corruption and tax evasion if the entire method is made simple and easy. 21

22. Canon of Diversity The cannon requires that there should be a number of taxes of different varieties so that every class of citizen may be called upon to pay something towards the national exchequer. Being heavily dependent on a single tax source can be detrimental for the economy. Canon of diversity states that it is better to collect taxes from multiple sources rather than concentrating on a single tax source. Otherwise, the economy is more likely to be confined, and hence, its growth will be limited as well. 22

23. Canon of Flexibility Canon of flexibility means that the entire tax system should be flexible enough that the taxes can easily be increased or lowered, in accordance with the government needs. This flexibility ensures that whenever the government requires additional revenue, it can be generated without much hassle. Similarly, when the economy isn’t booming, lowering taxes shouldn’t be a problem either. 23

24. Principles of Taxation Benefits received Ability to pay

25. Principles of Taxation Under the benefit principle, taxes are seen as serving a function similar to that of prices in private transactions Tax burden should be measured by what is spent (i.e., consumption) rather than by what is earned (i.e., income). The benefit principle states that the individuals who receive the benefit of the good or service should pay the tax necessary to supply the good. Examples are gasoline taxes and airport taxes, both paid by travelers.

26. Principles of Taxation The ability-to-pay principle states that individuals who are most able to bear the burden of the tax should pay the tax. Those who have higher incomes can afford to pay a greater proportion of their income in taxes, regardless of the benefits The best example of this is a progressive tax, such as the income tax.

27. The ability-to-pay principle requires that the total tax burden will be distributed among individuals according to their capacity to bear it, taking into account all of the relevant personal characteristics. Historically there was common agreement that income is the best indicator of ability to pay. 27

28. Difficulty of Applying the Principles of Taxation The principles of taxation are difficult to apply because, among other reasons, the two principles often conflict. In funding health care, for example, the poor should pay because they benefit the most, while under the ability-to-pay principle, the rich should pay. it is difficult to implement the benefit principle for most public services because citizens generally have no inclination to pay for a publicly provided service

29. Characteristics of Effective Tax System A good tax system should meet five basic conditions: fairness, adequacy, simplicity, transparency, and administrative ease. 29

30. Characteristics of Effective Tax System…. Fairness , or equity, means that everybody should pay a fair share of taxes. There are two important concepts of equity:  horizontal equity  and  vertical equity . Horizontal equity  means that taxpayers in similar financial condition should pay similar amounts in taxes. Vertical equity  is just as important, however. Vertical equity means that taxpayers who are better off should pay at least the same proportion of income in taxes as those who are less well off. Vertical equity involves classifying taxes as  regressive ,  proportional , or  progressive. 30

31. Characteristics of Effective Tax System…. Adequacy  means that taxes must provide enough revenue to meet the basic needs of society. A tax system meets the test of adequacy if it provides enough revenue to meet the demand for public services, if revenue growth each year is enough to fund the growth in cost of services, and if there is enough economic activity of the type being taxed so rates can be kept relatively low. 31

32. Characteristics of Effective Tax System…. Simplicity  means that taxpayers can avoid a maze of taxes, forms and filing requirements.  A simpler tax system helps taxpayers better understand the system and reduces the costs of compliance. Transparency  means that taxpayers and leaders can easily find information about the tax system and how tax money is used.  With a transparent tax system, we know who is being taxed, how much they are paying, and what is being done with the money. We also can find out who (in broad terms) pays the tax and who benefits from tax exemptions, deductions, and credits. 32

33. Characteristics of Effective Tax System…. Administrative ease  means that the tax system is not too complicated or costly for either taxpayers or tax collectors. Rules are well known and fairly simple, forms are not too complicated, it is easy to comply voluntarily, the state can tell if taxes are paid on time and correctly, and the state can conduct audits in a fair and efficient manner. The cost of collecting a tax should be very small in relation to the amount collected. 33

34. Classification of Taxes 34

35. Classification of Taxes Taxes can be classified into various types on the basis of form, nature, aim and method of taxation. The most common and traditional classification is to classify into direct and indirect taxes . 35

36. Classification of Taxes Direct taxes A direct tax is that tax whose burden is borne by the same person on whom it is levied. The ultimate burden of taxation falls on the person on whom the tax is levied. It is based on the income and property of a person. Thus income tax, corporation tax on company’s profits, property tax, capital gains tax, wealth tax etc are examples of direct taxes. Indirect taxes An indirect tax is that tax which is initially paid by one individual, but the burden of which is passed over to some other individual who ultimately bears it. It is levied on the expenditure of a person. Excise duty, sales tax, custom duties etc are examples of indirect taxes. 36

37. Classification of Taxes On the basis of degree of progression of tax, it may be classified into: Proportional tax Progressive tax Regressive tax Degressive tax 37

38. Classification of Taxes Proportional tax A tax is called proportional when the rate of taxation remains constant as the income of the tax payer increases. In this system all incomes are taxed at a single uniform rate, irrespective of whether tax payer’s income is high or low. The tax liability increases in absolute terms, but the proportion of income taxed remains the same. Progressive tax When the rate of taxation increases as the tax payer’s income increases, it is called a progressive tax. In this system, the rate of tax goes on increasing with every increase in income. 38

39. Classification of Taxes Regressive taxation A regressive tax is one in which the rate of taxation decreases as the tax payer’s income increases. Lower income is taxed at a higher rate, whereas higher income is taxed at a lower rate. However absolute tax liability may increase. Degressive taxation A tax is called degressive when the rate of progression in taxation does not increase in the same proportion as the increase in income. In this case, the rate of tax increases upto a certain limit, after that a uniform rate is charged. Thus degressive tax is a combination of progressive and proportional taxation. This type of taxation is often used in case of income tax. This is the case of income tax in India as well. 39

40. Types of Taxes Income Tax Tax on all yearly profits arising form property, possessions, trades or offices Tax on a person’s income, emoluments and profits Personal Income tax: Tax on income received by individuals Corporate income tax: Tax levied on accounting profits of corporations 40

41. Value-added Tax (VAT) Tax imposed and collected on every sale, barter, exchange or transaction deemed sale of taxable goods, properties, lease of goods, services or properties in the course of trade as they pass along the production and distribution chain Capital Gains Tax Tax imposed on the gains presumed to have been realized by the seller for the sale, exchange or other disposition of real property located in the in a nation, classified as capital assets 41

42. Excise Tax Tax applicable to specified goods manufactured in a nation for domestic sale or consumption Specific tax: imposed on certain goods based on weight or volume capacity or any other physical unit of measurement (Specific tax = volume x tax rate) Alcohol products, petroleum products, tobacco products 42

43. Property tax Tax on value of items of wealth – usually residential, commercial and industrial properties Levied on owner of property Value assessed periodically by tax authorities 43

44. Revenue Administration Revenue Administration is a public institution operating under Ministry of Finance. The Revenue Administration is responsible for levying and collecting state taxes and respecting the taxpayer rights within the framework of Constitutional Law and tax legislation After the end of Rana regime in 1951, attempts were made to modernize the revenue administrations just like the tax system (Nepal). 44

45. Revenue Administration The Ministry of Finance, the revenue section was made responsible for dealing with tax administration at the central level. The revenue administration at present comprises of the Inland Revenue administration, Customs A dministration, Revenue I nvestigation A dministration and Revenue Administration Training Centre.

46. Revenue Administration… Inland Revenue administration has Inland Revenue Department as the Headquarter. Similarly, it also has one Large Taxpayer Office, 22 Inland Revenue Offices and 28 Taxpayer Service Offices as field offices. Customs administration is the second part of the revenue administration made up of the Customs Department, one post clearance audit office, 30 main customs offices and 143 sub-customs offices. Revenue Investigation Administration has one department, four regional offices and six check-posts.

47. Revenue Administration… The Revenue Administration Training Centre is responsible for capacity building of revenue and account cadres. The revenue administration has a total strength of 2,439 approximately , of which 989 work in the Inland Revenue administration, 1247 in the customs administration, 180 in the revenue investigation administration and 40 at the Revenue Administration Training Centre. 47

48. The end 48