Chapter-1
Public Finance: “ Public finance is the study of the principles underlying the
spending and raising of funds by public authorities”- Findlay Shirras
Q1. What is Tax? Characteristics of Tax. And, Purposes or objectives of taxation.
Ans : “Tax means the income tax payable under the ordinance and includes any additional
tax, excess profit tax, penalty, interest, fees or other charges leviable or payable under this
ordinance”- Section 2(62) of the ITO 1984
Characteristics of Tax :
The Characteristics of a Tax may be studied under the following heads:
1. Tax is payment of government to the government by the people as it is levied by the
government as per the section 83 of the constitution of Bangladesh.
2. Payment of taxes is non-penal and compulsory; hence, refusal to pay a tax is a
punishable offence.
3. An element of sacrifice is there in the payment of a tax as they pay the taxes in order
to ensure public interest.
4. The aim of tax collection is to finance the government expenditure to ensure public
interest and welfare.
5. Tax is not any fine or penalty.
6. Tax can only be imposed by the government of a country.
Purposes or objectives of taxation :
Taxation is a major source of revenue for the government. Taxation is a way to transfer the
resources from privet or non-government sectors to government sector. The Main purposes or
objectives of tax are enumerated below:
1. Revenue collection: Tax is a major sources of revenue for the government. In
Bangladesh, tax revenue accounts for nearly 80 percent of the total government
revenue.
2. Reduction of inequalities in income and wealth: One of the main objectives of
taxation is to reduce inequalities in income and wealth.
3. Accelerating economic growth: In order to ensure the economic growth, the tax
system must be so designed as to raise the rates of saving and investment.
4. Control of consumption: The government not only raises revenue through taxation
but it also imposes restriction on the use of creation goods and services in a way
desirable and respectable for a health state of the society.
5. Protection of local industries: In order to protect the local industry for the uneven
competition government may provide tax incentives for local industries and so, should
design the tax policy to ensure the protection of poor local industries.
Q2. Canons of Taxation.
Ans: Canons of taxation refer to the administrative aspects of a tax. According to adam
smith, there are four canons or maxims of taxation which are still recognized as classic and
there are some other cannons referred by other economists some of which are explained
below:
Canons of Taxation
Adam Equality, certainty, Economy, Elasticity, productivity, Bastable
Smith Convenience Simplicity, Expediency
1. 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.
2. Canon of certainty: The canon suggested that the tax which an individual has to pay,
should be certain and not arbitrary.
3. Cannon of Economy: Every tax ought to be so contributed as both to taken out and
to keep out of pockets of the people as little as possible, over and above what it brigs
into the public treasury of the state.
4. 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 for the contributor to pay it.
5. Canon of productivity/ Adequacy: The state should be able to function with the
revenue raised from the people by means of taxes, which should adequately cover the
government expenditure and cannot bbe forced to resort to deficit financing.
6. Canon of Simplicity: This norm suggests that tax rates and tax systems ought to be
simple, plain and intelligible to the common understanding.
7. 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 the revenue.
8. Canon of diversity: A tax system should not be based on a single taxor only a few
taxes.
9. Canon of Expediency: A tax should be determined on the ground of economic, social
and political expediency.
Q3. Impact, incidence and effect of a tax.
Ans : Taxes impose a burden on the taxpayer because he sacrifices something. This burden
does not always lie on the shoulders of a person from whom it is collected.
Tax Impact: The impact of tax is the immediate money burden where tax falls on the person
who pays the tax in the instance (who has legal responsibility to pay).
Tax Incidence: On the other hand, incidence of tax means the final money burden of a tax
ultimate resting point of tax. The incidence of tax is on the person who cannot shift it to
anybody.
Effect of a Tax: When a tax is imposed and collected, it involves certain responses from
taxpayers and the economy.
Q4. Burden of a Tax
Ans:
Money burden/ formal incidence: It is the reduction in the disposable income of the
taxpayers. This can be of two types:
1. Direct money burden- amount of tax being paid by the taxpayers to the tax authorities.
2. Indirect money burden- additional money expenses incurred by the taxpayers for tax
payment
Real Burden: It is the loss of welfare to the taxpayers and the community as a whole,
in term of increasing unemployment etc. This is two types:
1. Direct real burden: Sacrifice of the welfare, which the tax itself imposes upon the
taxpayers, but not as net of the benefits, if any.
2. Indirect money burden: Indirect loss of welfare which results from interference with
consumer choice.
Q5. Distinction between impact and incidence of Tax
Ans: A distinction can be made between the impact and incidence of a tax on the following
grounds:
1. A tax reduces the income of the person on whom the incidence rests, while the effect
of the tax is the pressure or influence of the incidence.
2. Tax incidence is direct money burden and tax effect is the indirect money burden.
3. The effects of a tax can be the result of the facts of tax imposition itself and they
could also follow from the process of shifting its incidence.
Chapter-2
Q1. Role of income tax in economic development of Bangladesh
Ans: As it has been discussed before, taxation is one of the major sources of public revenue
to meet a country’s revenue and development expenditures with a view to accomplishing
some fundamental economic and social objectives, such as redistribution of income, price
stabilization and discouraging harmful consumption. The government of Bangladesh has
taken various measures to modernize the tax system and imposed various provisions in the
income tax ordinance, 1984. Some of the provisions are as following:
1. Tax Holiday scheme: According to section 45, 46, 46A ,46B, 46C, 47 and para 44 &
45 of sixth schedule part A of the ITO,1984, an industrial enterprise established
within prescribed time limit in the prescribed area shall be exempted from tax for
certain period five to ten years.
2. Investment allowance: Investment allowance is given on the investment in new
machineries (like machineries of new Fishing boats & passenger boats) @ 20%, if
they are established in NRB specified areas it is 25 %.
3. Accelerated depreciation allowance: Depreciation allowance is allowed on the new
machineries used in various industries at a specifies rate(100% in first years for
specified areas, and 80% in first and 20% in the second yeard for industries
established in other areas)
4. Tax incentives for small & cottage industries: According to section 47(b)(ii) tax
incentives are allowed on the income and profit of cottage industries to encourage
investment which can contributed to the economy significantly.
5. Tax incentives for encouraging saving: The government also encourages saving
providing tax credit facilities on certain types of investment and expenditures. Such
as, investment in stock market, saving certificate etc.
6. Tax exemption in certain expenditures: Certain expenditures to enhance social
welfare like contribution to president’s/ prime ministers’ relief fund; Government
Zakat fund etc.
Q2.Scope of Bangladesh Income Tax Law
Ans: In order to determine income tax on the income of an assessee in Bangladesh, certain
provision, rules and regulation have to be kept in mind. They are as follows:
1. The Income Tax Ordinance,1984: The ITO, 1984 come into force on 1st July, 1984
as income tax manual I. it has 23 chapter, 187 section, numerous sub-section and
seven schedules containing provisions regarding assessment, penalty, appeal etc.
2. Income Tax Rules, 1984: Every Act normally gives power to an authority,
responsibility for implementation of the Act, to make rules for carrying out purposes
of the Act. Section 185 of the ITO, 1984 has given power to the national Board of
revenue to make such rules named income Tax Rules, 1984.
3. Finance Act: Finance Minister presents this as Finance Bill in the Parliament. Once
the Finance bill is approved by the parliament and gets the assent of the president, it
becomes the Finance Act.
4. SRO (Statutory Regulatory Orders)/ Circulars/Notification from NBR:
According to the section 185 of the Income Tax Ordinance, 1984, NBR can issue
certain Orders/ circulars as and when necessary.
5. Judicial Decisions: In the course of assessment proceeding, there may sometimes
arise a dispute between the NBR and the assessee over the interpretation of some of
the provisions of the act and rules.
