Fundamentals of Taxation
Definition Taxation
Is it pain ?
Is it mandatory?
Is it obligatory ?
Fundamentals of Taxation
Definition Taxation
Derived from the Latin word taxo (the rate), a tax may be defined as a financial
charge upon an individuals or on body corporate imposed by the state by introducing
/proclaiming act/ordinance making the failure to Pay such charges punishable under
the relevant act/ordinance.
Black’s Law Dictionary described tax as a financial burden laid upon the individuals or
property owners to support the government expenditures exacted by legislative
authority.
Macmillan Dictionary described tax as an amount that an individual or corporation
have to pay to the government that it uses to provide public services and pay for
government institutions.
On the other hand Justice Holmes tried to make taxes less odious by means of
felicitous definition “Taxes’ are what we pay for civilised society”. He further remarked
“I like to pay taxes. With them I buy civilisation”
Even considering the comments of Justice Holmes, it may be concluded that tax is not
a voluntary payment, or donation rather a non penal forced payment exacted by
legislative authority for rendering social services to the recipients of such services.
Fundamentals of Taxation
Definition Income
The income tax ordinance 1984 deals with taxation of
income without specifically defining what is ‘income’.
“Income is the dark cat in the bag of the income tax code”.
The question what is income is not determined by the way in
which a sum is dealt with in the accounts or the language in
which the parties describe the transaction. The income tax
ordinance merely sets out certain provisions as to particular
kinds of receipts that should be excluded or included and as
to the methods of computation of income.
Fundamentals of Taxation
Definition Income
Black’s Law Dictionary described “Income” means that which
comes in or is received from any business or investment of
capital, without reference to the outgoing expenditures;
while “profits” generally means the gain which is made upon
any business or investment when both receipts and
payments are taken into account. “Income,” when applied to
the affairs of individuals, expresses the same idea that
“revenue” does when applied to the affairs of a state.
Fundamentals of Taxation
Definition Assessee
“Assessee” is defined as meaning a person by
whom income tax or any other sum of money
including penalty or interest is payable under
income tax ordinance 1984. It also includes every
person in respect of whom any proceedings under
this ordinance is taken for the assessment of his/her
income/loss or of the amount of refund due to
him / her.
Fundamentals of Taxation
Definition Assessee
The definition covers two categories: first persons by whom
any tax, penalty or interest is payable under the Ordinance,
whether any proceeding under the Ordinance has been
actually taken against them or not, and secondly, persons
against whom any of the proceedings under the act has
been taken, whether he is or is not liable to pay any tax,
penalty or interest.
The definition makes explicit that “assessee” includes a
person who is assessable in respect of the income or loss,
or who is deemed to be an assessee or an assesee in default
under any provision of the ordinance.
Fundamentals of Taxation
Definition Deemed Assessee
As per the provisions of the Ordinance, the following persons
will be considered as an “Assessee”
1. Individual(male) below age of 65 years having yearly
income exceeding Tk.2,20,000.00
2. Individual (female and male aged above 65 years)
having yearly income exceeding Tk. 2,25,000.00,
3. Disabled individual having yearly income exceeding
Tk.3,00,000.00
4. Individual owning residential building exceeding 3,200
sft
5. Individual owning a motor vehicle
Fundamentals of Taxation
Definition Deemed Assessee
6. Individual having land line telephone connection having
ISD facilities.
7. Member of any club having registration with VAT
8. Business man having trade license and bank account
9. Professionals from all disciplines
10.Member of Chamber of Commerce or of any other trade
association
11.Individual participating in the election of union parishad,
municipality, city corporation and or national assembly
Should there be any person or body which cannot properly
be placed in any of these groups can not be made liable to
tax even though it may have income. Because of this the
Government was absolved from income tax.
Fundamentals of Taxation
Principles of a Good Taxation System
The basic characteristics of a good taxation system is the
extent of balance of interest between tax payers and that of
tax collectors.
Adam Smith was the first economist suggested four features
(canons) of taxation. Activities and functions of the
government have increased significantly since Adam Smith's
time. Government is expected to maintain economic
stability, full employment, reduce income inequality &
promote growth and development. Now tax system should
be such that it meets the requirements of growing state
activities
Fundamentals of Taxation
Principles of a Good Taxation System
Principle of Equity
Adam Smith suggested that citizens should pay the taxes
proportionate to their income i.e., in proportion to the
revenue which they respectively enjoy under the protection
of the state.
The principle requires the establishment of economic and
social justice to the citizen by ensuring that every person
should pay to the government depending upon his ability to
pay. The higher class should pay higher taxes to the
government, because without the increased support of the
government authorities they could not have increased their
ability to pay.
Fundamentals of Taxation
Principles of a Good Taxation System
Principle of Certainty
According to Adam Smith, the tax payer should be certain
about the amount of tax to be paid by him and the time
within which the tax to be paid and form of payment as well.
At the same time, government should also be certain about
the amount of tax to be received and time by which the
amount will be received.
There should not by any ambiguity in both for tax payers
and the government.
An efficient taxation system should be certain and free from
any sort of ambiguity.
Fundamentals of Taxation
Principles of a Good Taxation System
Principle of Convenience
The mode and timing of tax payment should be as
far as possible, convenient to the tax payers. For
example, land revenue is collected at time of
harvest.
For convenience of the tax payers income tax is
collected at source .
Convenient tax system will not be a burden for
the tax payers and will encourage people to
pay tax and will increase tax revenue.
Fundamentals of Taxation
Principles of a Good Taxation System
Principle of Economy
This principle states that there should be economy
in tax administration. The cost of tax collection
should be lower than the amount of tax collected.
It may not serve any purpose, if the taxes
imposed are widespread but are difficult to
administer. Therefore, it would make no sense to
impose certain taxes, if it is difficult to administer.
Fundamentals of Taxation
Principles of a Good Taxation System
Principle of Productivity
It is also known as the principle of fiscal
adequacy. According to this principle,
the tax system should be able to yield
enough revenue for the treasury and
the government should have no need to
resort to deficit financing. It is
considered to be a good principle to
follow in a developing economy
Fundamentals of Taxation
Principles of a Good Taxation System
Principle of Elasticity
According to this canon, every tax imposed
by the government should be elastic in
nature. In other words, the income from
tax should be capable of increasing or
decreasing according to the requirement of
the country. For example, if the government
needs more income at time of crisis, the tax
should be capable of yielding more income
through increase in its rate.
Fundamentals of Taxation
Principles of a Good Taxation System
Principle of Flexibility
It should be easily possible for the
authorities to revise the tax structure both
with respect to its coverage and rates, to
suit the changing requirements of the
economy. With changing time and
conditions the tax system needs to be
changed without much difficulty. The tax
system must be flexible and not rigid.
Fundamentals of Taxation
Principles of a Good Taxation System
Principle of Simplicity
The tax system should not be
complicated that makes it difficult to
understand and administer and results
in problems of interpretation and
disputes.
In Bangladesh, government is making
continuing it’s efforts to make the
system simple and assessee friendly.
Fundamentals of Taxation
Principles of a Good Taxation System
Principle of Diversity
This principle states that the government should
collect taxes from different sources rather than
concentrating on a single source of tax. It is not
advisable for the government to depend upon a
single source of tax, it may result in inequity to the
certain section of the society; uncertainty for the
government to raise funds. If the tax revenue comes
from diversified source, then any reduction in tax
revenue on account of any one cause is bound to be
small.
Fundamentals of Taxation
Requirement of a good Tax Structure/System
The tax structure is a part of fiscal management of a country and
thus to be structured in such a way so as to suit the overall
economic environment. A tax system that does satisfy this
basic condition can be termed as a good one.
However, the state should pursue mainly following principles
in structuring its tax system : The primary aim of the tax should be to raise revenue for
public services.
 People should be asked to pay taxes according to their ability
to pay and assessment of their taxable capacity should be
made primarily on the basis of income and property.
 Tax should not be discriminatory in any aspect between
individuals and also between various groups.
Fundamentals of Taxation
Impact and Incidence of Taxation.
Definition of Incidence of Tax
One of the very important subject of taxation is the problem of
incidence of a tax. By incidence of taxation is meant final
money burden of a tax or final resting place of a tax. It is the
desire of every government that it should secure justice in
taxation, but if it does not know as to who ultimately bears
money burden of a tax or out of whose packet money is
received, it cannot achieve equality in taxation. If government
knows who pays tax, it can evolve an equitable tax system. It
can easily tap important sources of taxation and thus can
collect large amount of money without adversely affecting
economic and social life of the citizens of the country.
Fundamentals of Taxation
Impact and Incidence of Taxation.
Definition of Impact of Tax
Impact of a tax is on person from whom government collects
money in first instance. While incidence of a tax is on person
who finally bears burden of a tax.
Explanation:
To make it more clear, we take an example. Suppose
government levies tax on electric goods. Tax will be paid to
Government in first instance by manufacturers of electric
goods. Impact of tax is, therefore, on them. If manufacturers of
electric goods industries add tax to price and succeed in selling
goods at higher prices of electric goods to consumers, burden
of tax is thus shifted on to consumers.
Fundamentals of Taxation
Impact and Incidence of Taxation.
Incidences is different from shifting
Incidence is final resting place of a tax while shifting is
process of transferring money burden of tax to someone
else. Shifting finally ends in incidence. When a person on
whom tax is levied tries to shift tax on to the other, he may
succeed in shifting tax completely, partly, or may not
succeed at all. Shifting of tax can take place in two
directions, forward and backward. If tax is shifted, from
seller to consumer, it is a case of forwarding shifting.
Backward shifting takes place when consumers do not
purchase commodities at increased prices. Sellers are then
forced to cut down prices and bear burden of tax
themselves. Backward shifting is thus performed by buyers.
Fundamentals of Taxation
Impact and Incidence of Taxation.
Incidence and effect of a Tax
Distinction between the concepts of
incidence and that of effect is important.
As stated earlier incidence is direct money
burden of a tax.
Effect of taxation is the consequences of
imposition of a tax on individuals and on
community in general.