Saturday, June 5, 2010

Public Revenue and its Sources (Tax)

Public Revenue and its Sources:

Public revenue deals with the question what are the sources of government revenue, i.e. how much amount government will earn from each earning source. Main sources of public revenue are fee, commercial income, fine and compensation, income from government resources, issue of note, interest, public debts, no heir of any wealth and gift by any person, miscellaneous sources etc.

Tax:

A tax is a compulsory payment levied on the persons or companies to meet the expenditure incurred on conferring common benefits upon the people of a country.

Two aspects of taxes follow from this definition:

· A tax is a compulsory payment and no one can refuse to pay it.

· Proceeds from taxes are used for common benefits or general ourposes of the state.

Features of Tax:

· Tax is non-penal.

· It is not fee. Fee is given for getting specific direct benefits.

· It is paid without any expectation of direct benefit.

· It is compulsory payable by the persons. People are bound to pay tax if it is imposed.

· It is the prime source of revenue for the government.

· It is an instrument for achieving special objectives.

Canons or Principles of Taxation:

· Canon of equality: The canon of equality implies that the burden of taxation must be distributed equally or equitably in relation to the ability of the tax payers. Equity or social justice demands that the rich people should bear a heavier burden of tax and the poor a lesser burden.

· Canon of certainty: The canon of certainty implies that the tax payer should be well informed as to the time amount, and the method of the payment of tax.

· Canon of convenience: Every tax ought to be levied at the time or in the manner in which it is most likely to be convenient to pay it.

· Canon of economy: The government has to spend money on collecting taxes levied by it. Since collection costs of taxes add nothing to the national product, they should be minimized as far as possible. If the collection cost of a tax is more than the total revenue yielded by it, it is not worthwhile to levy it.

· Canon of productivity/adequacy: The government should be able to function with the revenue raised from the people by means of taxes which should adequately cover the government should not be forced to resort to deficit financing.

· Canon of elasticity: The tax system should be flexible so that it is possible for the authority to revise the rates and system with the least in convenience in order to increase or decrease revenue.

· Canon of simplicity: This norm suggests that tax rate and tax systems ought to be simple, plain and intelligible to the common understanding.

· Canon of diversity: A tax system should not be based on a single tax or only a few taxes. There should be a large variety of taxes so that all the citizens, who can afford to contribute to the government revenue, should be made to do so. There should be a wide admixture of direct and indirect taxes.

Features of a good Taxation System:

· Imposition of tax according to ability to pay.

· Introduction of progressive taxation system.

· Taxation system should be productive.

· Taxation system should be certain.

· Expenditure of collection of tax should be minimum.

· It should be convenient to pay tax.

· Tax system should be diversified.

· It should be elastic.

Classification of Tax:

On the basis of tax rate tax can be of three types:

· Proportional tax: A proportional tax is one in which, whatever the size of income, the rates of taxation remains constant.

· Progressive tax: Under this system the rate of taxation increases as the taxable income increases.

· Regressive tax: A tax is said to be regressive when rate of taxation decreases as the taxable income increases.

On the basis of impact and incidence of tax, tax can be of two types:

· Direct tax: Direct taxes are those taxes which are paid entirely by those persons whom they are imposed.

· Indirect tax: Indirect taxes are those taxes which are imposed on production and sale of commodities and services.

Differences among Progressive, Proportional and Regressive Taxes:

No.

Particulars

Proportional Tax

Progressive Tax

Regressive Tax

1

Definition

A proportional tax is one in which, whatever the size of income, the rates of taxation remains constant

Under this system the rate of taxation increases as the taxable income increases

A tax is said to be regressive when rate of taxation decreases as the taxable income increases

2

Relationship

There is direct and positive relation between income and tax rate, in proportion

There is direct and positive relation between income and tax rate, in progressive way

There is inverse and negative relation between income and tax rate, in regressive way

3

Example

Income Tax rate 10000 10%

20000 10%

30000 10%

Income Tax rate 10000 10%

20000 15%

30000 20%

Income Tax rate 10000 20%

20000 15%

30000 10%

4

Social Justice

It does not ensure social justice, because rich and poor people have to pay in same proportion

It ensures social justice, because rich and poor people have to pay according to their ability to pay

It does not ensure social justice, because rich people have to pay less and poor people have to pay more

Differences between Direct and Indirect Taxes:

No.

Particulars

Direct Tax

Indirect Tax

1

Impact and incidence of tax

The impact and incidence of tax on same person

The impact and incidence of tax on different person

2

Shift to tax burden

There is no scope of shift to tax burden

Tax burden can be shifted to another person

3

Example

Income tax

VAT, import duty, turnover tax etc

4

Tax system

Progressive tax system

Proportional or regressive tax systems

5

Social Justice

It ensure social justice

It does not ensure social justice

6

Civil awareness

It creates civil awareness

It does not create civil awareness

7

Scope

Its scope is limited. Because only high income people have to pay

Its scope is wider. Because both rich and poor people have to pay

8

Elasticity

It is elastic in nature

It is inelastic in nature

9

Complexity

It is complex in nature. Taxpayers feel it is cumbersome

It is simple to pay tax

10

Popularity

It is unpopular to the taxpayers for its complexity

It is popular to the taxpayers for its simplicity

Advantages and Disadvantages of Direct Tax:

Advantages:

· Equitable since they are progressive in nature. Rich people pay more tax whereas the poor pay less.

· Economical since the administrative cost of collecting this tax is low.

· Elastic since they can be adjusted as per the needs of the state.

· Certain since both taxpayer and government are certain about the rate, amount and time regarding tax collection.

· It creates civic consciousness among the taxpayers as they pay income tax directly.

Disadvantages:

· Large scale tax evasion by the dishonest taxpayers using loopholes of the tax system.

· The taxpayers have to disclose their secret information about sources of income, amount of income, wealth etc. This is unpleasant to the taxpayers.

· As it is progressive in nature, it discourages to income more by doing more work.

· It is complex to pay. As the taxpayers have to submit many documents to pay this sort of tax.

· It is unpopular. Because taxpayers have to pay it directly and they consider it as burden. Besides, it is complex in nature in calculation and taxpayers have to submit many documents.

Advantages and Disadvantages of Indirect Tax:

Advantages:

· They are very convenient to pay since taxes are included in price of the commodities or services.

· They are generally difficult to be evaded as they are included in the price of the commodities or services.

· It can be used to control the consumption of luxury and harmful goods by imposing high taxes. It can be also used to encourage the local products by imposing high tax on foreign products.

· Highly revenue productive in a developing country since both rich and poor people have to pay tax and also in same proportion.

· It is popular. Because taxpayers pay it indirectly and they do not consider it as burden. Besides, it is easy to pay.

Disadvantages:

· They are inequitable since same rates are applied for both rich and poor people.

· They are uneconomical since the collection of these taxes involves many stages and thus the cost of collecting becomes greater.

· It is a cause of inflation since it increases the cost of production.

· It is uncertain since tax authorities are not sure about the amount of tax collection.

· It does not create civic consciousness among the taxpayers as they pay tax indirectly.

Tax Structure of Bangladesh:

· Direct taxes contribute only a small proportion of total tax revenue.

· Predominance of income tax among the direct taxes.

· Negligible direct contribution of the agricultural sector to tax revenue.

· Heavy reliance on indirect taxes.

· Import dependency of indirect tax base.

· Poor tax-GDP ratio.

· Tax system not progressive in the aggregate sense.

· Canon of economy, convenience and productivity are not followed properly.

· Tax authority is not efficient and also dishonest, so government is deprived from huge amount of tax revenue.

2 comments:

  1. I commend to you the ideas of Henry George on this. See http://www.wealthandwant.com/themes/Canons.html

    ReplyDelete
  2. Its just ideas but its easy to make full marks for students.

    ReplyDelete