Taxation- Copy.ppt

Taxation defination amd rules

1. Taxation
Thediscussionaboutpublicfinance,publicexpenditureandpublicrevenueare
centrictothetaxbecausemostofthegovernmentexpenditureormajorsources
ofgovernmentrevenueareraisedfromtax.
Frenchword‘taxe’andlatinword‘taxare’whichmeans‘tocharge’.
“Taxesarecompulsorypaymenttogovernmentwithoutexpectationof
directreturninbenefittothetaxpayer.”P.E.Taylor
Taxationistheprocessoftaxcollection.Itcoversallofthefollowing:passing
ofthelawbytheparliament,makingofrulesbytheGovernment,entiresetof
peopleappointedastaxcommissioners,assessment;theappellateauthorities&
soon.
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2. Taxation
TaxationisInherentpowerofthesovereign.Itisexercisedthrough
thelegislature.Itisforthepurposeofraisingrevenuestocarryout
thelegitimateobjectivesofthegovernment.Itistoimpose
burdensuponthesubjectandobjectwithinitsjurisdiction.
Ataxisacompulsorychargeorpaymentimposedbygovernment
onindividualsorcorporations.Thepersonswhoaretaxedhaveto
paythetaxesirrespectiveofanycorrespondingreturnfromthe
goodsorservicesbythegovernment.
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3. Taxation
Taxationisasystemthatthegovernmentusestocollecttaxes
frompeopleandbusinesses,basedontheirincome,assets,or
transactionvalues.Theprimarypurposeoftaxationistoraise
revenueforthegovernment,althoughthegovernmentdoesuse
taxestopromotebeneficialactivities,suchasstartingabusinessor
gettinganeducation,ortolimitundesirablebehavior,suchas
smokinganddrinkingalcoholicbeverages.
Taxpayersdonotliketotakethetimeandefforttocomplywith
thetaxrulesnordotheywanttopaytaxes.Mostpeopleagreethat
taxesshouldimposeassmallacostonsocietyaspossible.
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4. 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.Multipletax:Whenthetaxcomprisesdifferenttypesoftaxesitis
calledmultipletax.Atpresent,allthecountriesintheworldfollow
multipletaxsystem.
B.Classificationonthebasisofimpactandincidence
1.Directtax:Directtaxesarethosetaxeswhicharepaidentirelybythose
personsonwhomtheyareimposed.Theburdencannotbeshiftedto
others-suchasincometax,landrevenuetaxetc.
2.Indirecttaxes:Indirecttaxesarethosetaxeswhichareimposedon
salesorpurchaseofonlygoodsorservices.Heretheburdenisultimately
shiftedtoothers.SuchasVAT,Customdutyetc.
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5. C.Classificationonthebasisofstructureoftaxrate
1.Proportionaltax:Aprofessionaltaxisoneinwhich,whateverthe
sizeofincome,theratesoftaxationremainsconstants.Herethesame
percentageischangedonalltaxpayer.Forexample,taxonTK.100000is
10%andTK.500000isalso10%.Hereinabsoluteformtaxhasincreased
inproportiontorateofincreaseofincome.
2.Progressivetax:Underthissystem,therateoftaxationincreasesas
thetaxableincomeincreases.Theprincipleofprogressivetaxis“higher
theincome,highertherate.Forexample,taxontotalincomeof
TK.100000is10%butonTk.500000is15%.
3.Regressivetax:Ataxisregressivewhenitsburdenfallsheavilyonthe
poorthantherich,Sincethetaxratedecreasesasthetaxbase(income)
increases.Thisisjustoppositeofprogressivetax.Salestaxisregressive
tax.Iftwoindividualsspendthesameamountonagivenproduct,they
willbothpaysamesalestax,regardlessofwhetheroneearnsmorethe
otherone.
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6. 4.Digressivetax:Taxeswhicharemildlyprogressive,hencenotverysteep
sothathigherincomedonotmadeaduesacrifice,suchtaxesonthebasis
ofequityarecalleddigressive.Indigressivetaxation,ataxmaybeslowly
progressiveuptoacertainlimit,afterthatitmaybechangedataflatrate.
InBangladesh,thissystemisfollowed.
Thetaxratefortheassessmentyear2020-21
IndividualTax-thetax-freeincomethresholdofmaletaxpayersisTk.3lakh
andthetax-freeincomethresholdoffemaletaxpayersandtaxpayersabove65
yearsofageisTk.3lakhand50thousand.theminimumtaxrateforindividuals
is5percent,andthemaximumtaxrateforindividualsis25percent.The
followingtablepresentsthetaxratefortheassessmentyear2020-21
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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%

7. 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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8. F.Classificationaccordingtotaxingauthority:
1.Centraltax:TaxleviedbythecentralgovernmentiscalledasCentraltax.
2.Localtax:TaxleviedbythelocalauthoritieslikeCitycorporation,
Municipality,UnionParishadetc.
Principles/ Canon of taxation
AdamSmith,thefatherofEconomyhaslaiddownfourprinciples/cannonsof
taxationtheseprinciplesarestillconsideredtobethestatingpointofsound
publicfinance.
1.Canonofequityorability:Byequalitywedonotmeanthatpeople
shouldpayequalamountbywayoftaxestothegovernment.Byequalityis
meanequalityofsacrifice,thatispeopleshouldpaytaxesinproportionto
theirincome.
2.Canonofcertainty:TheCanonofcertaintyimpliesthatthereshouldbe
certaintywithregardtotheamountwhichtaxpayersiscalledupontopay
duringthefinancialyear.Thetaxpayerisdefiniteandcertainaboutthe
amountofthetaxanditistimeofpayment,hecanadjusthisincometohis
expenditure.
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9. 3.Canonofconvenience:Itmeansthatthetextshouldbeleviedatthetime
andmannerwhichismostconvenientforthecontributortopayit.For
example,ifthetaxonagriculturelandiscollectedininstalmentsafterthe
cropisharvested.Itwillbeveryconvenientfortheagriculturististopayit.
4.Canonofeconomy:TheCanonofeconomyimpliesthattheexpensesof
collectionoftaxesshouldnotbeexcessive.Theyshouldbekeptaslittleas
possibleconsistentwithadministrationefficiency.
Other principle/Canon:
1.Productivity:Indicatesthatataxwhenleviedshouldproducesufficient
revenuetothegovernment.
2.Elasticity:Thetaxsystemshouldbefairlyelasticsothatifatanytimegovt.
isinneedofmorefundsitshouldbeincreaseitsfinancialresourceswithout
incurringanyadditionalcostofcollection.Incometax,railwayfares,postal
ratesareverygoodexampleofelastictax.
3.Simplicity:Taxsystemshouldbefairlysimple,plainandintelligibletothe
taxpayer.Ifitiscomplicatedanddifficulttounderstandthenitwillleadto
oppressionandcorruption.
4.Diversity:Thesystemoftaxationshouldincludealargenumberoftaxes
whichareeconomical.Thegovt.shouldcollectrevenuefromitscitizenby
levyingdirectandindirecttaxes. 9

10. 10
Characteristics of a good tax system:
Acentralissueinpubliceconomicsistheappropriatedesignofagoodtax
system.Itisasystemthatdesignsandimplementsataxpolicythatreduces
inefficiencyanddistortioninthemarketundergiveneconomicconstraints.
Suchasystemisusuallyviewedasbalancingthevariousdesirableattributesof
taxation.Agoodtaxation/taxationsystemhasthefollowingprinciples:
Certainty
Equity
Convenience
Administrative efficiency
Economic principle
Simplicity
Acceptability

11. Effectsoftaxationonthepeople
Topalliatetheeffectsoftaxationonthepeople,taxpolicyatleastnominally
strivestoachievetwoobjectives:EfficiencyandEquity.
Taxefficiency
Taxefficiencyminimizesthecostofcomplyingwiththetaxcodebyreducing
itsadministrativeburdenandbyminimizinganydistortionsintheeconomy
causedbythetax.
Reducingtheadministrativeburdennotonlybenefitsthetaxpayersbutalsothe
economysincetaxcollectionisnotanobjectiveoftaxpolicy,butsimplya
requirement.
Anotherobjectiveoftaxpolicythatislittleheededisthatburdenlossesshould
beminimized.Althoughthecostofcomplyingwiththetaxrulesdoesgenerate
someburdenlosses,mostburdenlossesareincurredbytheactualtaxitself,
especiallywhenitisassessedonworkingincome.
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12. Anotheroftenstatedobjectiveoftaxpolicyisthattaxesshouldnot
distorteconomicdecisions,whichoccurswhenpeopledecideto
dosomethingdifferentlybecauseofthetax.
Forinstance,hightaxesonworkingincomediscourageswork
becauseitraisesthepriceoflaborforemployersanddecreasesthe
disposableincomeforworkers.Thathigherpricesreducesdemand
andlowerpricesdecreasessupplyarewell-establishedeconomic
principles,yetworkingincomeistaxedmorethaninvestment
income.
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13. Taxation
TaxationEquity
Taxationequityistheprinciplethattaxesshouldbefair.However,
thereareseveralcriteriafordeterminingwhatisfair.
Thebenefitsprinciplestatesthatpeopleshouldpaytaxesbasedon
thebenefitsthattheyreceivefromgovernmentservices.
Forinstance,excisetaxesongasolineareusedtobuildroadsand
bridges.
However,taxesonincomeandinvestmentsarebasedontheabilityto
pay.
Theability-to-payprinciplecanbeclassifiedasverticalequityand
horizontalequity.
Verticalequityistheprinciplethatpeoplewithhigherincomes
shouldpaymoretaxes,suchastheprovisionfortheincreasing
marginaltaxratesonhigherincome.
Horizontalequityistheprinciplethatpeoplewithhighernecessary
expensesshouldpaylesstaxthansomeoneelsewithequalincome
butwithouttheexpenses.
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14. Taxation
Thedifficultyinformulatingtaxpolicyisbalancingtheoften
conflictinggoalsofefficiencyandequity.
Theeconomistshaveputforwardmanytheoriesoftaxationat
differenttimestoguidethestateastohowefficiencyand/orequityin
taxationcanbeachieved.
Ataxationtheorymaybederivedontheassumptionthatthere
neednotbeanyrelationshipbetweentaxpaidandbenefits
receivedfromstateactivities.
Therearetwotheories,namely,
Theexpediencytheory
Thesocio-politicaltheory
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15. Taxation
Ataxationtheorymaybebasedonalinkbetweentaxliability
andstateactivities.Itwouldassumethatthestateshould
chargethemembersofthesocietyfortheservicesprovidedby
it.
Thisreasoning,ontheonehand,justifiesimpositionoftaxesfor
financingstateactivitiesandontheother,byinferences,providesa
basis,forapportioningthetaxburdenbetweenmembersofsociety.
Thislogictherefore,yieldtwotheories,namely,
Benefitreceivedtheory
Cost-of-servicetheory
Thefinaltheoryoftaxationistheabilitytopaytheory.
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16. Taxation
Theexpediencytheory
Thistheoryassertsthateverytaxproposalmustpassthetestof
practicability.Itmustbetheonlyconsiderationweighingwiththe
authoritiesinchoosingataxproposal.
Economicandsocialobjectivesofthestateasalsotheeffectsofa
taxsystemshouldbetreatedasirrelevant.
Thispropositionhasatruthinit,sinceitisuselesstohaveatax
whichcannotbeleviedandcollectedefficiently.Thereare
pressuresfromeconomic,socialandpoliticalgroups.Everygroup
triestoprotectandpromoteitsowninterestsandauthoritiesare
oftenforcedtoreshapetaxstructuretoaccommodatethese
pressures.
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17. Taxation
Theexpediencytheory………
Inaddition,theadministrativesetupmaynotbeefficienttocollect
thetaxatareasonablecostofcollection.Taxationprovidesa
powerfulsetofpolicytoolstotheauthoritiesandshouldbe
effectivelyusedforremedyingeconomicandsocialillsofthe
societysuchasincomeinequalities,regionaldisparities,
unemployment,cyclicalfluctuationsandsoon.
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18. Taxation
Thesocio-politicaltheory
AdolphWagneradvocatedthatsocialandpoliticalobjectivesshouldbe
thedecidingfactorsinchoosingtaxes.Wagnerdidnotbelievein
individualistapproachtoaproblem.Hewantedthateacheconomic
problemshouldbelookedatinitssocialandpoliticalcontextandan
appropriatesolutionfoundthereof.
Thesocietyconsistedofindividuals,butwasmorethanthesumtotalof
itsindividualmembers.Ithadanexistenceandentityofitsownwhich
neededpreservationandtakingcareof.
Accordingly,ataxsystemshouldnotbedesignedtoserveindividual
membersofthesociety,butshouldbeusedtocuretheillsofsocietyasa
whole.
Wagner,inotherwords,wasadvocatingamodernwelfareapproachin
evolvingandadoptingataxpolicy.Hewasspecificallyinfavorofusing
taxationforreducingincomeinequalities.
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19. Taxation
Thesocio-politicaltheory……….
Hemaintainedthatprivatepropertyandinheritanceweretheresult
ofstatepoliciesandnotbecauseofanyGod-givenrights.The
State,therefore,hadtherighttocontroltheownershipofproperty
anditsinheritanceintheinterestsofthesocietyasawhole.
Wagner’sideas,thoughmuchcriticizedatthattime,arenowthe
focalpointoffiscalpoliciesofmodernstate.
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20. Taxation
Thebenefits-receivedtheory
Thistheoryproceedsontheassumptionthatthereisbasicallyan
exchangeorcontractualrelationshipbetweentax-payersandthestate.
Thistheoryexplainsthateverycitizenshouldbecalledupontopaytaxes
inproportiontothebenefitsderivedbyhimfromservicesprovidedby
theGovernment.Itisimpliedthatthestateprovidescertainfacilitiesto
itscivilianswhoshould,therefore,contributetothecostorvalueof
thesefacilitiesinproportiontobenefitsreceivedbythem.
Themorethebenefitacitizenderives,themoretaxesheshouldbear,is
themainassumptionofthetheory.Theprinciplejustifiesthepaymentof
taxes.Italsomeasuresbenefitsreceivedbytheindividualsinthecaseof
certainspecialtaxessuchaspetroltax,bettermenttaxetc.
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21. Taxation
Thebenefits-receivedtheory…………
Thetheoryhasbeensubjectedtovariouscriticisms.
(1)Firstly.theassumptionthatthetaxshouldbepaidbyan
individualinproportiontobenefitsconferredbytheStateon
thatindividual,isquiteunrealisticbecausethebenefitsderived
cannotbecorrectlymeasuredintermsofmoney.Benefitis
purelyasubjectivematterandthereisnoscientificwayto
measurethemagnitudeofbenefitanditsmoneyvalue.
(2)Secondly.ifbenefitsaccruedtoanindividualisthebasisof
taxation,thepoormustpayhighertaxesbecauseinawelfare
Statethepoorgetmorebenefitsthantherichfromthe
expenditureoftheGovernment.Thisisclearlyunjustandas
suchanunacceptableproposition.
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22. Taxation
Thebenefits-receivedtheory…………
Thetheoryhasbeensubjectedtovariouscriticisms.
(3)Thirdly.itisalsoverydifficulttodetermineunderthistheory
whatproportionofthegeneralbenefitsaccruetoparticular
individuals.Governmentisforcivilizedexistenceandthereis,
therefore,nobasisforvaluingtheserviceswhichtheStaterenders.
(4)Fourthly.mostoftheservicesprovidedbytheStateare
indivisibleandbeneficiariesareunidentified.Forexample,itisnot
possibletodividethebenefitsofnationaldefense,etc.
(5)Fifthly.certainbenefitsaccrueonlytodefinitepersonsandin
definiteproportion.Ifthisprincipleisfollowed,thewholeofthe
benefit,theyshouldreturntotheStateastaxes.Forexample;
pensionpaidtoretiredservants,definiteandclearenoughand
therefore,theyshouldofferthewholeoftheirpensionastaxes.
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23. Taxation
Thebenefits-receivedtheory…………
Thetheoryhasbeensubjectedtovariouscriticisms.
(6)Finally,theequitabledistributionofwealth,themain
objectiveofmostofthemodernGovernments,willbe
defeatedifthisprincipleisfollowed.
Theabovedescriptionmakesitamplyclearthatthebenefit
principlecannotensurejusticeinthedistributionofburdenof
taxesamongdifferentsectionsofthesociety.
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24. Taxation
Thecostofservicetheory
Inademocraticcountry,thepoliciesoftheGovernmentshouldbe
basedontheprincipleofjusticeotherwisethepeoplewillprotest
againsttheunjustpoliciesoftheGovernment.Thetaxationpolicy
oftheGovernmentshouldbebasedonjusticeandequity.How
justicecanbeachievedisaverycrucialelementoftaxation
system.
ThistheoryimpliesthattheGovernmentshouldtaxthecitizens
accordingtothecostofservicerenderedbyit.TheGovernment
renderscertainservicestocitizensandthecostofsuchservices
shouldbecollectivelymetbythecitizens.Thetax,anindividual
shouldbear,mustbeequaltothecostofbenefitbereceives.
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25. Taxation
Thecostofservicetheory………………
CriticismsofCostofServiceTheoryorTaxation:Thetheoryisalso
subjectedtoseveralcriticismsbymanyeconomists-
Firstly,findingouttotalcostofservicesrenderedbytheGovernmentisvery
difficultandtherefore,thequestionofdistributionoftotalcostamongcitizensis
notsoeasytosolve.
Secondly.ifwebelievethatthetotalcostofservicescanbedetermined,the
nextdifficultyishowtodividethecostoftheservicesamongindividuals.
Thirdly,ifthistheoryisfollowedinthemodernwelfarestate,thepoorerwill
havetopaymoretaxesbecausetheyenjoymorebenefits.Hence,itisopposite
totheprincipleofjustice.
FourthlyandFinally,thecostoftheservicesrendereddependsverymuchon
theefficiencyoftheadministrator.Iftheadministratorisefficient,thecost
wouldbelowerandiftheadministratorisinefficient,thecostofthebenefit
wouldbehigher.
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26. Taxation
Abilitytopaytheory
Thisapproachconsiderstaxliabilityinitstrueform-compulsory
paymenttothestatewithoutquidproquo(athinggiveninreturn
forsthelse).Itdoesnotassumeanycommercialorsemi-
commercialrelationshipbetweenthestateandthecitizens.
Accordingtothistheory,acitizenistopaytaxesjustbecausehe
canandhisrelativeshareinthetotaltaxistobedeterminedbyhis
relativepayingcapacity.
Thisdoctrinehasbeeninvogueforatleastaslongasthebenefits
theory.AgoodaccountofitshistoryisfoundinSeligman.
Thistheorywasboundtobesupportedbysocialistthinkers
becauseofitsconformitywiththeideasandconceptsofjustice
andequity.However,thedoctrinereceivedanequallystrong
supportfromnon-socialistthinkersalsoandbecameapartofthe
theoryofwelfareeconomics.
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27. Taxation
Abilitytopaytheory…..
Thebasictenetofthistheoryisthattheburdenoftaxationshould
besharedbythemembersofsocietyontheprinciplesofjustice
andequityandthattheseprinciplesnecessitatesthatthetaxburden
isapportionedaccordingtotheirrelativeabilitytopay.
Somedisadvantagesoftheability-to-payprinciplearethe
difficultyindefining“abilityto-pay,”theadoptionofprograms
whosetotalcostsexceedtotalbenefits,andthereductionofwork
incentives.
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