PUBLIC FINANCE The government of a country generally performs two types of functions, namely, obligatory functions (e.g. defense, maintenance of law-and-order situation etc.) and optional functions (¢.g.. providing various facilities to its citizens like infrastructure, health, environment etc.). To perform all these functions adequately and efficiently, government requires funds from the public who are the real beneficiary of the public expenditure. How and in what form the government should collect revenue and how it should spend it for the maximum benefit.of the society is a matter to be decided by the government considering the various political and socio-economic characteristics of a country. The science that deals with the income and expenditure of the government and the principles, problems and policies relating to these matters is known as public finance. A few definitions. will support the view: “Public finance is the study of the principles underlying the spending and raising of ‘funds by public authorities.” ~ Findlay Shirras : “Public finance is one of those subjects which lie on the border-line between . It is concerned with the income and the expenditure of public, authorities and with the adjustment of the one to the other.” ~ Hugh Dalton economies and politi “Public finance deals with the provisions, custody and, disbursement of resources needed for the conduct of public or governmental functions." =H: L. Lutz ‘There is hardly any fundamental difference in the central idea.of the above definitions i.e., public finance relates to the income and expenditure of a government. / PUBLIC FINANCE VS. PRIVATE FINANCE The basic principles of public finance and private finance’ are same. Individuals and states are similar in-that both need-resources. Both has intension to-secure- maximum results from their resources. Both attempts to get the best out-of all items of expenditure. There are; however, some important points of difference between private and public finance, They are ~ 1 Adjustment of Income to Expenditure. An individual adjusts his expenditure to his income. He is advised to cut his coat according to his cloth. Buta State first . fixes the size of its expenditure - and then proceeds to raise the necessary revenues. Thus, it has to adjust income to expenditure, Expenditure is determined first, and the revenues are then raised accordingly. O Period of Time. For an individual, there is no definite period over which the accounts must be balanced. State tries to balance its budget in the course of year. QO Private Finance is hrouded in Mystery. No individual will permit his neighbor or friends to get any idea as to how he stands financially. But there is no such: mystery in Government finance.~ In the case of an individual, there can be no internal borrowing; it has always to be an external Joan. But the government can borrow both internally from its own people and externally from foreign governments and from foreign people. An individual has to earn his income, whereas the State gets most of its income from people’s income. No doubt sometimes the States also run productive enterprises and get income on their own account. 1 order to meet its expenditure. But no such The State can issue paper currenc course is open to a private individual. No equi-marginalizing of milities. An individual tries to maximize satisfaction from his income by distributing his expenditure in such a manner as to have eq marginal utility in every case, But State expenditure is done by the Finance Department in an objective manner, not by equi-margii ing of utilities. Surplus budgeting is a virtue for an individual but need not be so for the State, sensible individual must use less than his income. He ought to have a superfluous financial plan. For an individual, this is considered a virtue. However, for a nation it- need not be so. IMPORTANCE OF PUBLIC FINANCE The role of public finance is very crucial for a moder Zovernment as every government ensures “Social Welfare” to its citizens and therefore, the scope of governmental activities has been increasing day by day. Modern government do not only confine themselves to law and order situations, but they also actively intervene in economic matters to justify themselves as, ‘Welfare States’. The governments. require money to spend it on welfare of citizens. Hence, the importance of public finance has increased greatly in recent years. The importance of public finance can be justified on the following grounds- a The government of an underdeveloped country Protection to infant industries protects its infant industries against foreign competition through various public finance activities like imposition of heavy tariff duties on imports, putting restrictions on imports, giving subsidies to keep the cost low etc. Planned Economic Development: Public finance renders valuable help in the planned economic development of a country. The planning authorities the priorities of expenditure for the plan period and raise the necessary funds to implement the plans through various fiscal measures. ; Public finance regulates the consumption habits Regulating Consumption Habit of the people. It imposes taxes on items of consumption, the use of which is to be discouraged such as wine, cigarettes etc. and allows concessions and rebates in taxes if it likes to encourage the consumption of any commodit Reducing Inequalities: Public finance also plays a vital role in reducing social inequalities, through its fiscal policies, The Government can levy heavy taxes on the richer sections of the society and spend the incomes so received on providing rious facilities to poor sections of the society such as providing free medical facilities, education, cheap housing, cheap rations through fair price shops etc.D Maintaining Balance of Trade: The government always restricts the imports only to the essential items hence imports of non-essential items are taxed heavily and encourages the exports of its surplus production. It reduces the tax burden on export items and also supports them with subsidies and grants. These operations help the government to maintain the balance of trade. 0 Industrial Development: Public finance helps industrial development as — * Government grants subsidies and grants to various industries these days to enable them to increase the production of different items. = Public finance induces the investment during the time of recession through its taxation policies by allowing rebates and other fiscal advantages for investments in desired direction. = The role of public finance in under-developed countries is to bring economic stability to keep the level of consumption and investment quite up to the level of production. It requires continuous trimming of the investment process to keep the productive process in the same speed. = To strengthen the economic development in developing countries, it is essential to give highest priority to capital formation. Therefore, there must be policies to.encourage savings by cutting peoples” wasteful expendittire. © Industrial development of a country will bring in more employnient - opportunities to people especially in under-developed countries. "Managing public money more effectively the government may ensure sufficient power, skilled manpower, infrastructure etc. for the businessmen which may generate positive growth in the economy. Thus, it is evident that the government of a country can push up the industrial and economic development of the country, provide more employment opportunities, encourage investments and savings in the desired direction and increase social benefits through public expenditure. However, it can have an influential check over infructuous economic and social activities, mitigate the inflationary and deflationary trends in the economy, regulates the consumption and production of unwanted items, and can regulate the flow of imports to protect its own industries and so on, which affects the overall economic and social system of the country. PUBLIC FINANCE AND THE ECONOMIC SYSTEMS An economic system is a means by which societies or governments organize and distribute available resources, services, and goods across a geographic region or country. Economic systems regulate factors of production, including capital, labor, physical resources, and entrepreneurs. An -economic system encompasses many institutions, agencies, and other entities. There are many economies around the world. Each has its own distinguishing characteristics, although they all share some basic features. Each economy functions based on a unique set of conditions and assumptions. Economic systems can be categorized into four main types: traditionalMaximum Social Advantage is achieved at the point where the marginal social benefit of public expenditure and the marginal social sacrifice of taxation are equated, i.e., where MSB = MSS. This shows that to obtain maximum social advantage, the public expenditure should be carried up to the point where the marginal social benefit of the last money spent becomes equal to the marginal social sacrifice of the last unit of money taxed, The equilibrium point of maximum social advantage may as well be illustrated by means of a diagram, as above. In the above figure, MSS is an upward sloping curve implying that the social ‘sacrifice per unit of taxation goes on increasing with ‘every additional unit of money raised. MSB is a downward sloping curve implying that the social benetits per unit diminishes as the public expenditure increases. The curves MSS and MSB intersect at point P when it reaches to the maximum social advantage. Based on the Principle of Maximum Social Advantage: Q: The resources of the government must be distributed using the Equi-marginal principle i.c., marginal return of satisfaction must be same forall. Taxation must be done based on the principle of least aggregate sacrifice i.e., the marginal utility of money paid in taxation must be’ equal to all taxpayers. The limitations of the Principle of Maximum Social Advantage are: QO Difficult to put into practice’- utility being subjective in'nature, creates a great obstacle for the state to balance marginal utility and disutility. Measurement difficulty — quantification of tax burden/social benefit is difficult. It ignores macro system = disiitility caused: to the’taxpayer'is micro problem, whereas marginal utility gained is a macro concept. Highly unrealistic restrictions - the argument that govt. should not have surplus or deficit budget is highly unrealistic. , Equi-marginal principle is not applicable to public expenditure (Social benefit) Policy of functional finance does not permit MSB = MSS. oo a a0 MEANING AND SOURCES OF PUBLIC REVENUE Governments need to perform various functions in the field of political, social & economic activities to maximize social and economic welfare. In order to perform these duties and functions government require large amount of resources. These resources are called public revenues. Public revenue deals with the sources of government revenue, i.¢., how much amount government will earn from each earning sources. Public revenue consists of taxes, revenue from administrative activities like fines, fees, gifts, grants etc. Capital Receipts and Revenue Receipts Capital Receipts are the income generated ‘from the non-operating sources, having a long-term effect. These are the income received by the company which is non- recurring in nature. They are generally part of financing and investing activities rather than operating activities. The capital receipts either reduces an asset of increases a liability. The receipts can be generated from the following sources:Issue of Shares Issue of debt instruments such as debentures. Loan taken from a bank or financial institution. ” Government grants. Insurance Claim. Additional capital introduced by the proprietor: ooo00o00 Revenue Receipts are the major source of income of the enterprise, jout which a business may not survive for a long time, These are the receipts: which arises through the core business activities. These receipts are a part of normal business operations that is why they occur again and again however its benefit can be enjoyed only in the current accounting year as its effect is short term,, The income received from the day- to-day activities includes all the operations that bring cash into, the business like: Revenue generated from the sale of inventory Services Rendered c Discount Received from the creditors or suppliers Sale of waste material/scrap Interest Received Receipt in the form of dividend Rent Received ooooo0oo00 Tax Revenue and Non-tax Revenue Tax revenue is the first and foremost source of publicirevenue: Taxes are compulsory payments to government without expecting direct benefit or returh by the taxpayer. Taxes collected by Government are used to provide common benefits to all mostly in form of public welfare services. Taxes do not guaranteeany direct benefit for person who pays the'tax,"i.e., it is not based on direct quid pro quo principle. Tax revenue, the major source of public revenue, is generated from taxes on income, profits and _ capital gains, taxes, on, goods.and_services-etc, The government collects tax revenue by way of ‘direct & indirect taxes, Direct taxes include income tax, gift tax and wealth tax. Indirect taxes include custom duty, excise duty, VAT and supplementary duty, service tax ete. Non-tax revenue is the revenue obtained by the government from sources other than tax. The major sources of non-tax revenue are: O Fees: These are charged by public authorities for rendering a service to the citizens. Unlike tax, there is no compillsion’ involved in case of fees. For example, fees are charged for issuing of passports, driving licenses, etc. O Fines or Penalties: These are imposed as‘a fori of punishment for breach of law or nonfulfillment of certain conditions of for failure to observe some regulations. Like taxes, fines are compulsory payments without quid pro quo. O Surplus from Public Enterprises: The Government also gets revenue by way of surplus from public enterprises. In Bangladesh, the Government has sct up several public’ sector enterprises to provide public goods andiservices. Some ofthe public sector enterprises do make a good amount of profits. The profits or dividends which the government gets can be utilized for public expenditure. O Special assessment of betterment levy: \t is a kind of special charge levied on certain members of the community who are beneficiaries of certain government activities or public projects. For example, to construct a bridge a government may impose levy on people in that locality since they may experience an appreciation in the value of their property or land. Q_ Granis, and Gifts: Gifts are voluntary. contributions by individuals or institutions to the government. Gifts are significant, source of revenue during war and emergency. A grant from one government to another is also an important source of revenue in the modern days, Grants ftom.foreign countries are known as Foreign Aid. Developing countries receive military aid, food aid, technological aid, etc. from developed countries. 4 O° Deficit Financing” Deficit ‘imédins’an excess of public’ expenditure over public Fevenue. This excess may be met by borrowings from the domestic sources, from abroad, or by the central bank creating currency. DEFINITION OF TAX The term 'tax' has been derived from‘the French word ‘taxe’ and ctymologically, the Latin’ word’ ‘faxare’ is’ related’ tothe tetm’'tax’, which! means ‘to charge’. Tax is a contribution exacted by’the ’‘state.'It is'a non-penal but compulsory and unrequited transfer’ of ‘resources from ‘thé’ private to the’ public sector, levied based on predetermined criteria. According to Article 152(1) of the Constitution of Bangladesh, taxation ‘includes the imposition of any tax, ‘rate, duty or impost, whether general, local or special, and tax shall be construed accordingly. Taxes are the most important source of revenue of the modern governments. ti ‘compulsory: levy, to be paid by the citizens who are liable to pay it, imposed by the government. Many economists like Seligman, Adam Smith, Bastable. Taussig and Dalton hold the unanimous opinion that tax is a compulsory payment to the government by taxpayer without any expectation of some specified return. But ‘essence of the argument is this that the "taxpayer, is not entitled to claim return of his taxes though he may receive benefits of the services which the State provides by means ‘of the taxes collected from him and many other like him. The followings are the various “definitions of tax given by different economists: ‘tax’ means the income tax payable under the income tax actiand includes any profit: tax, penalty, super tax, fine; interest, fees or other Section 2(21) of the ITA 2023 additional ta charges leviable or payable under this act” exces “A tax is purely and simply a contribution, whether direct on masked which the public authorities impose -upon the. inhabitants or, goods forthe purpose of defraying government expenditure," ~ Leroy Beaulieu“A tax is a. compulsory contribution imposed by a public authority irrespective of the service rendered to the taxpayer in return and not imposed as penalty exact amount of for any legal offense. ~ Dalton “Taxes are compulsory payment to government without expectation of direct return in -P.E, Taylor benefit to the taxpayer. The above definitions make it clear that taxes are compulsory contribution by the taxpayer to the government. CHARACTERISTICS OF TAX The characteristics of a tax may be studied under the following heads; Tax is levied by the government as per Sec 83 of the Constitution of Bangladesh. Payment of taxes is non-penal and compulsory; hence refusal to pay a tax is a punishable offence. An element of sacrifice is there in the payment of a tax as they pay the taxes in order to ensure public interest. The aim of tax collection is to finance ‘the government expenditure to ensure public interést and welfare. r Tax is not the cost of the benefit conferred by the government on the public. The benefit received trom the country is not directly the return of tax. It is one of the prime sources of revenue for the government. Tax is not any fine or penalty. Tax can only be imposed by the government of a country. oOo oOo oO ooo a PURPOSES OR OBJECTIVES OF TAXATION Taxation is a major source of revenue for the government. In order to accelerate economic development as well as to ensure the defense, administration, social welfare and other development activities government needs huge amount of resources. Taxation is a way to transfer the resources from private or non-government sectors to government sectors. The main purposes or objectives of tax aré cnumerated below: OQ Revenue collection: Tax is a major source of revenue for the government. In Bangladesh tax revenue accounts for nearly 85 percent of the total government revenue. Therefore, the first and foremost aim of taxes is to raise public revenue to meet the over increasing public expenditure. OD Reduction of inequalities: in, income and wealth: One of the main objectives of taxation is to reduce inequalities in income and wealth. This is possible by taxing rich people. heavily and to confer benefit to the poorer section through progressive income tax, wealth tax, expenditure tax etc. O Accelerating economic growth: In order to ensure the economic growth, the tax system must be so designed as to raise the rates of savings and investments. This savings may be invested in productive sectors of the country.O Control. of consumption: The government not only raises revenue through taxation, but it also imposes restriction on the use of certain goods and services in a way desirable and respectable for a healthy state of the society. Taxes on intoxicant, tobacco etc. raise public revenue no less than other taxes but their main aim is to prevent the deterioration of health of general public. More tax is also levied on luxury goods to reduce their use. DO Protection of local industries: In order to protect the local industries from the uneven competition government. may provide tax incentives for poor local industries and so, should design the tax policy to ensure the protection of poor local industries. QO) Economic development: The tax revenue can be used by the government to ensure the economic development of the country. It can be used to build the infrastructure, to invest in social, security programs, in various poverty elevation programs. Government can invest. in productive sectors and can reduce unemployment. So, it can be said that the purpose of tax is not only the collection of revenue, but also to ensure the economic development and social welfare of the country. But it is only possible when the country designs the tax policy in aneffective and efficient manner. TAX BASE A tax base is a total amount of assets or income that can be taxed by a taxing authority, usually by the government. It is used to calculate tax liabilities. This can be in different forms, including income or property. A tax base is defined as the total value of assets, properties, or income in a certain area or jurisdiction. To calculate the total tax liability, the tax base must be multiplied by the tax rate ie. (Tax Liability = Tax Base < Tax Rate), The rate of tax imposed varies depending on the type of tax and the tax base total. Income tax, gift tax, and estate tax are each calculated using a different tax rate schedule. , CANONS OF TAXATION Canons of taxation refer to'the administrative aspects of a tax. They relate to the rate, amount, method of levy and collection of a tax. In other words, the characteristics, or qualities which a good tax’ should \possess are: geiierally ‘described as :canons of taxation. 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:O 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 taxpayers, Equity or social justice demands that the rich people should bear a heavier burden of tay and the poor a lesser burden. O Canon of Certainty: The canon suggests that the tax which an individual must pay, should be certain and not arbitrary, The taxpayer should be well informed as to the time, amount, and the method of the payment of tax. O Canon of Economy: Every tax ought to be so contributed as both to take out and to keep out of pockets of the people as little as possible, over and above what it brings into the public treasury of the State. QO Canon of Convenience ry tax ought to be levied at the time or in the way it is most likely to be convenient for the contributor to pay it. O 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 be forced to resort to deficit financing. O Canon of Simplicity: This norm suggests that tax rates and tax systems ought to be simple, plain, and intelligible to the common understandin, O 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’ inconvenience to increase or decrease the revenue. O Canon of Diversity: A tax system should not be based onva single tax orjonly a few taxes. There should be a large variety of taxes so that all the citizens, who can afford to contribute to the State revenue, should be made to do so. There should be a wide admixture of direct and indirect taxes. O Canon of Expediency: A tax should be determined on the ground of economic, social, and political expediency. O Canon of Functional Efficiency: A tax policy and system of a country should be effective and efficient so that it can generate sufficient revenue for the government to ensure the economic development of the country. The system should be able to reduce the harassment and tax avoidance. A tax system with the above canons will be,able to generate sufficient revenue and fulfill the objectives and purposes of taxation. CHARACTERISTICS OF A GOOD TAX SYSTEM ‘Tax has a very important role in the economic development of a country. As a major source of government revenue, tax ensures the availability of resources for the various development programs undertaken by the government. A good tx system is one which has predominantly good taxes and which fulfils most of the canons of taxation and yields sufficient revenue yet cause minimum aggregate sacrifice to the people and minimum obstruction to incentives for production, When a satistictory balance is struck between these wo objectives, it is an ideal tax system, In order to be treated as 4 good tax system, it should be featured with following characteristics:Tax should~be levied” based on fundamental” principles” of taxation like. the principle of least sacrifice, cost, and benefit and above all ability to'pay..-" 1 Taxes should follow the most important canons, i.e., it should’ be equitable, convenient to pay, certain, economical, productive, and elastic. E 0 Tax system should be balanced containing both direct and indirect nature of taxes so that it can maximize government revenue. The tax authority should be supported by sufficient simple laws and rules, skilled manpower and efficient administrative tools and techniques. 1 Tax system should have positive effect on production and distribution without causing any adverse effect upon ability and willingness to work, save and invest. O The tax system should be so framed as to ensure that the productive resources of the economy are optimally, allocated and utilized. For this purpose, it is essential that the tax system should be economically neutral. OA good tax system has least collection cost:to collect maximum amount of taxes. The tax system should provide no scope for the evasion of tax by the taxpaycr. Above all, the tax system should abide by the principle of maximum social advantage so that the society is benefited.to the maximum effect possible. Maximizing social advantage or least aggregate sacrifice is not the task of one tax, but from all the taxes. TAX IN ECONOMIC DEVELOPMENT The classical economists were in view that the only objective of taxation was to raise government revenue. But with the changes in circumstances and ideologies, the aim of taxes has also been changed. These days apart from the object of raising the public revenue, taxes are levied to alfect consumption, production and distribution with a view to ensuring the social welfare through the economic development of a country. For such:instance, tax can be used as an important tool in-the following manner: O. Optimum allocation of available resources: Tax is the most important source of public revenue. The imposition of tax leads to diversion of resources from the taxed to the non-taxed sector. This revenue is allocated on various productive sectors in the country with a view to increasing the overall growth of the country. Tax revenue may be used to encourage development activities in the less developed areas of the country where normal investors are not willing to invest. O Raising government revenue: In modern times, the aim of public finance is not merely to raise sufficient financial resources for meeting administrative expenses, for maintenance of law and order and to protect the\country from foreign aggression. Now the main object is to ensure the social welfare. The increase the collection of tax increases: the government revenue. It is safer for the government to avoid borrowings by increasing tax revenue. Q Encouraging savings and investment: Since developing countries like Bangladesh has a mixed economy, care has also to be taken to promote capital formation and investment both in the private and public sectors. Taxation policy is to be directed to raising the ratio of savings to national income.O Reduction of inequalities in income and wealth: Through reducing inequalities in income and wealth by using an efficient tax system, government can encourage people to save and invest in productive sectors. O Accelerating economic growth: Tax policy may be used to handle critical economic situations like depression and inflation. In depression, tax policy is set to increase the consumption and reduce the savings to increase the aggregate demand and vice versa. O Price stability: In under-developed countries, there is another role to maintain price stability to ensure growth with stability. OQ Control mechanism: Tax policy is also used as a control mechanism to check inflation, consumption of liquor and luxury goods and to protect the local poor industries from the uneven competition. Taxation is the only effective weapon by which private consumption can be curbed and thus resources transferred to the State. Thus, the economy can ensure sustainable development. Thus, it can be said that the economic development of a country ‘mainly depends-on the presence of an effective and efficient taxation policy. TAX BURDEN AND IT’S ALLOCATION APPROACHES Tax burden is considered as the amount of tax paid by a person, company, or country in a specitied period considered as a proportion of total income in that period. For public finance purposes the tax burden, or tax ratio, in a country is computed by taking the total tax payments for a particular fiscal year as a fraction or percentage of the Gross National Product (GNP) or national income for that year. While designing the tax policy of a country, any government tries to justify the imposition of various taxes for financing state activities and on the other, by inferences, provides a basis, for apportioning the tax burden between members of society. The following popular approaches are evident to allocate the tax burden. The Expediency Approach Under this approach, every tax proposal must pass the test of practicability. It must be the only consideration weighing with the authorities in choosing a tax proposal. Economic and social objectives of the state and the effects of a tax system should be treated as irrelevant since it is useless to have a tax which cannot be levied and collected efficiently. There are pressures from.cconomic, social, and political groups having their own agenda and authorities are often forced to reshape tax structure to accommodate these pressures, In addition, the administrative set up may not beinflationary pressures and price rise, Real value (or purchasing power) of the financial assets with the private sector decreases. Consequently, as in the case of tax payments, some real resources shift from the non-government sector to the government ownership and this tantamount to a hidden tax. The phenomenon of ‘hidden tax’ emerges from inflationary price rise, and this widens income inequalities. While printing moncy has inflation as a hidden cost, borrowing leads to high taxes or interest in future to repay it. Therefore, lower deficits need lower taxes. CLASSIFICATION OF TAXES Taxes have been differently classified by different economists in course of time. The classifications have been made on different bases, which are presented in the following figure followed by discussion: Classification Based on Number of Taxes O Single tax: Single tax is when the tax system of a country incorporates only one tax. In ancient times tax was levied on person as poll tax or head tax. Multiple tax: When the tax system comprises different types of taxes, it is called multiple tax. At present, all the countries in the world follow multiple tax system, i.e., government is collecting taxes on income, on expenditures, on wealth, etc. \W/ Classification Based on Impact and Incidence of Tax O Direct tax: Direct taxes are those taxes which are paid entirely by those persons ‘on whom they are imposed. The burden cannot be'shifted to others in case of direct tax. Such as, income tax, land revenue tax etc. © Indirect tax: Indirect taxes are those taxes which are imposed on sales or purchase of any goods or services other than’ personal services. Here the burden is ultimately shifted to others. Such as, VAT, customs duty ete. Types of Taxes f Numb * Single * Income Tax rae = Multiple * Wealth Tax Tab ca bil ae * Elastic | |» Value Added Tax areal Sl] PasuCHy | 7 Inelastic] | # Expenditure Tax 2 g Taxing = Central * Positive Change in |_| a | | Authority * Local = Negative Revenue 5 =|_| Subject * Personal] [* Proportional g 8 e = Matter = InRem ® Progressive = a Structure Impact & ® Direct * Regressive Incidence ® Indirect * DegressiveCritical Evaluation of Direct and Indirect Taxes Differences between direct and Indirect taxes Direct Tax Indirect Tax * Taxable Event Taxable Income/Taxable Wealth of the Purchase/Sale/Manufacture of goods and assessees, provision of services. + Levy & Collection —_Levied and collected from theassessee. __Levied & collected from the consumer but paid/deposited to the government by the Assessee/Dealer. = Shifting of Burden Directly borne by the assessee. Hence, Tax burden is shifted to the subsequent cannot be shifted. fultimate user. = Collected After the income for a year is earned or At the time of sale of purchases or valuation of assets is done on the rendering of services valuation date, Merits of Direct and Indirect Taxes Direct Tax Indirect Tax = Equitable since they are progressive in their rates. * Economical as it requires low administrative collection cost * Elastic since they can be adjusted as per the needs of the State. * Certain as the rate, amount and time regarding tax collection is known to both taxpayer and tax authority. * It is based on taxpayers’ ability that ensures distributive justice. * Iecreates civic consciousness among the taxpayers. "No scope for any leakage as it is directly paid to the treasury. Demerits of Direct and Indirect Taxes Direct Tax They are very convenient to pay since taxes are included in price. They are generally difficult to be evaded as they are included in the price of the goods. Highly revenue productive in a developing country since income level of the average people is tow. By taxing luxury goods heavily equitability can be ensured, Can be used to control the consumption of luxury, liquor and harmful goods by imposing high taxes. Indirect Tax * Large scale tax evasion by the dishonest taxpayers using loopholes of the tax system * Since the burden cannot be shifted, they are unpopular. * Direct taxes are found to be arbitrary to determine the degree of progression in taxation. * Since the taxpayers need to follow certain complex steps like filing returns, itis inconvenient. * Collection is not satisfactory if the system is not strong enough. They are inequitable since same rates are applied for both poor and rich. They are uneconomical since the collection of these taxes involves many stages and thus the cost of collection becomes greater. Indirect taxes give chance for cheating as the retailers may. charge the customers more than the ‘specific amount. It is a cause of inflation since it increases the cost of production“Clas ification Based on Structure of Tax Rate O Proportional Tax: A proportional tax is one in which, irrespective of income size, the rate of taxation remains-constant. Here the same percentage is charged on all taxpayers. For example, tax on Tk. 100,000 is 10% and Tk. 500,000 is also 10%. In the former case tax becomes Tk. 10,000 and in the later Tk. 50,000. Here in absolute form, tax has increased in proportion to rate of increase of income. Merits: : Demerits: © It is very easy and simple to calculate. It does not affect the existing pattern of distribution of income and wealth in the society as the tax rate is same for all. It is not based on the principle of equity. The burden of tax falls more heavily on the poorer section of the society. This system totally ignores the principle of taxable capacity. Does not reduce the inequalities of income/wealth in the society. O Progressive Tax: Under this system, the rate of taxation increases as the taxable income increases. The principle of a progressive tax is “higher the, income, higher the rate”. \t is considered more equitable. For example, tax on total income of Tk. 100,000 is 10% but on Tk. 500,000 is 15%. Here tax will increase more than proportionately. Merits: = Demerits: * Here, ‘income’ and ‘ability to pay’ are positively correlated. Moral as the richer section bears heavier burden of tax than the poorer section. It promotes equality in wealth and income distribution as ‘more income, more taxes’ is the principle of this tax system. The system is more flexible. During crisis. More taxes can be collected by adjusting the tax rates suitably. It is economical in the sense that with minor changes in the rates, substantial changes can be brought about in tax collection without incurring any extra cost. Arbitrary fixation of rates may be done in an indiscriminate manner when government needs more funds at a time of crisis. It adversely affects the propensity to save because the burden of tax falls more on those who can save because they have surplus. It dims the chances of more investments in productive sectors through reducing the savings. Tax evasion may be increased as it injects a feeling of tax evasion in the minds of those who are liable to pay tax at higher rates. This system discourages the productive activities in the country “because the producer is not interested to earn more. They also find it difficult to get funds at cheaper rates because the rates of savings go down.O Regressive Tax: A tax is regressive when its burden falls more heavily on the poor than the rich since the tax rate decreases as the tax base (income) increases. This is just the opposite of progressive tax. Sales tax is a regressive tax. If two individuals spend the same amount on a given product, they will both pay the same sales tax, regardless of whether one earns more than the other one. For another example, tax on total income of Tk. 100,000 is 15% but on Tk. 500,000 is 10%. Here tax will decrease more than proportionately. Merits: * Regressive taxes encourage savings and investment as high- income earners pay less tax and have more discretionary funds to use for investment and savings. = Regressive taxes increase net government revenue. As people have more after-tax income to use for savings and investment, these additional investments in turn generate more taxable income and the cycle begins again - more investment, more wealth, and ultimately more tax revenues. = Regressive tax systems encourage people to earn more income because the more you make, the more you get to keep. This incentive will produce more investment, savings, job growth, and national GDP. = Itdoes not follow the ability to pay principle. * This system totally ignores the principle of taxable capacity. * This tax increases inequalities of income/wealth in the society. Demerits: 1 Degressive tax: Taxes which are mildly progressive, hence not very steep so that high income does not make a due sacrifice, such taxes based on equity are called degressive. Here, a tax may be slowly progressive up to a certain limit, after that it may be charged at a flat rate. The merits and demerits of this tax system are similar to the progressive tax system. In Bangladesh, this system is followed where income tax rate of an individual for the assessment year 2023 — 2024 is: On first Tk. On next Tk. On remaining 350,000 100,000 300,000 400,000 + —_ 500,000 income @0% @5% @10% @is% ~@20% @25% Marginal tax rate against income as the base under these four categories of taxes are graphically presented in the figure below. The figure shows, the proportional tax rate has a constant slope, graphically, while the Progressive tax rate has a rising positive slope. The steeper the slope of the tax line, the progressive the tax regime. The regressive tax rate line has a declining negative slope. The steeper the negative slope of the tax line, the more regressive the taxation. The digressive tax rate line has a rising slope initially, but it becomes constant after a point,Figure: Marginal tax rate against income Progressive tax Degressive tax Proportional tax Regressive tax Marginal Tax Rate ° Base (Income) Above figure depicts the proportion of income taken away in taxation under different tax rates. Tax line (a) represents a progressive tax rate, tax line (b) represents a proportional tax rate, tax line (c) shows a regressive tax rate and tax line (d) denotes a digressive tax rate. Classification Based on Subject Matter of Taxation Personal tax (¢.g., income tax) is levied based on personal tax paying capability. O In Rem tax is levied on activities or objects like sales tax, wealth tax etc. Classification Based on Elasticity of Tax O Elastic tax: \f the rate of changes in tax is more than the rate of changes in the tax base, the tax is known as elastic tax. 1 Inelastic tax: If the rate of changes in tax is less than the rate of changes in the tax base, the tax is known as inelastic tax. Classification Based on Tax Base 1 Income tax is charged based on the income of a person or entity, ¢.g., income tax. O IWealth tax is charged on the value of financial asset e.g., shares, securities etc. or non-financial asset e.g., building, premises, land, Such as, wealth tax, gift tax etc. O Value Added Tax is charged on the value addition in a commodity or service. 1 Expenditure tax is charged on the expenditure like purchase tax, sales tax etc. Classification According to Change in Government Revenue [Reference: Musgrave and Musgrave, 1989, pp 216-217] Positive tax: These are taxes which increase the revenue of the government. Such as, income tax, wealth tax, VAT etc. 1 Negative tax: These are taxes which don’t increase revenue of the government, rather decrease. These are basically transfer payments like pension, gratuity etc. Classification According to Taxing Authority QO Central tax is levied by the central government. Such as, income tax, wealth tax. Local tav/Rate is levied by the local authorities, like City Corporation, Union Parishad, Municipality etc. This is also known as rates.Above discussion clearly portray that attaining an optimal tax structure is one of the most important issues for the government to increase the revenue generation for accelerating growth and to improve. the quality of life of the citizens. A long-term sustainable solution to enhance transparency, growth, improve tax compliance and thus to increase tax to GDP ratio is a much desirable issue in Bangladesh. RANKING OF BANGLADESH IN EASE OF PAYING TAXES Paying Taxes 2020 is a unique study from PwC, World Bank and IFC. The study provides data on tax systems in 190 economies around the world, with an ability to monitor tax reform. It is unique because it generates a set of indicators (the total tax rate, the time to comply and the number of payments) that measure the world’s tax systems from the point of view of a standardized business (using a case-study scenario). Paying Taxes is also unique in that it covers the full range of taxes paid in 190 economies by the company, measuring how the business complies with the different tax laws and regulations in each economy. The study not only looks at corporate income tax, but all of the taxes and contributions that a domestic medium- size case study company must pay. It considers the full impact of all these taxes in terms of both their tax cost and their compliance burden on business. According to the study, the ranking of Bangladesh is 151 (see below) among 190 countries (5 among:the SAARC countries.) So, Bangladesh has a'long way to go: Overall Number of Time to Comply Total Tax» Ranking _ Payments (Hours) Rate (%) Afghanistan 178 19 270 714 Bangladesh 15] 33 435 33.4 Nepal 175 46 377 41.8 Pakistan 161 34 283, 33.9 India 115 ul 252 49.7 Maldives 119 17 391 30.2 Sri Lanka 142 36 129 55.2 Bhutan 15 18 52 35.3 INCOME TAX - CONCEPT AND DEFINITION Income tax is a direct tax, which enjoys pride of place in the revenues of governments all over the world. In the fiscal scheme of our country, at present, income tax is levied along with other direct and indirect taxes like VAT, Excise duty, Gift tax etc. It is one of the most important sources of revenue for the government to ensure the equitable distribution of resources. Definition of Income Tax To generate revenue, government imposes tax on various areas. Of them, income tax is the tax which is levied on the taxable income of a person or entity as per theprovisions of the Income Tax Act, 2023. It is calculated and computed with reference to the total income of an assessce for a particular period (normally, on an annual basis). According to Section 2(14) of the ITA 2023, income tax means any kind of tax or surcharge leviable and payable in accordance with the provisions of this act. In section 18 of the ITA 2023, it has also been stated that the Income tax for any assessment year at any rate or rates shall be charged, levied, paid, and collected in spect of the total income of the income year or income years of every person. Some definitions of income tax given in the verdicts of various cases are as following: res “Income tax is a tax on income and not on anything else. It is one tax not a collection of taxes essentially distinct.” [Bengal Coal Co: Ltd. vs. Janardan Kishore Lal Singh (Cal) 1936 1.T.R. 392] “Income tax is a tax on income.” [Peter Merchant Ltd. vs. Stedeford; 30T.C. 496,509(CA)] “Income tax is one tax and not a collection of taxes of different items of income and assessment to income tax is one whole and not a group of assessments of different items of income,” [CIT vs. Numberumal Chatty & Sons (1933), I.T.R.32 at 37 (Mad)] “Income tax is an annual tax and the profits of each year should be subjected to income tax” (CIT vs. Sri Sukhdeodas Jalan (Pat) 1954, 26, I.T.R. 617] Above definition revealed that income tax is a direct and single tax charged on the total income of a person for an income year and inthe relevant assessment year: CHARACTERISTICS OF INCOME TAX From the above discussion, we can depict the following characteristics of income tax: OD Itisadirect tax. O _Levy of this tax is regulated by the Income Tax Act, 2023 [Act No. XII of 2023]. O_Itis charged on total income of an income year of a person in an assessment year. 1 The rate of income tax is determined by the government in the National ‘Assembly through the Finance: Act. Besides rules/orders/circulars are issued by the National Board of Revenue from time to time. It is one tax not a collection of taxes essentially distinct. Income tax is levied by the government on an annual basis. Tax imposed on items other than income is not income tax. ooo OBJECTIVES AND IMPORTANCE OF INCOME TAX 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 economic and social objectives, such as redistribution of income, price stabilization and discouraging harmful consumption. Income tax’is one of the most significant sourcesof public finance. Some major objectives and importance of income tax are as follows: O Revenue collection: Income tax is a major source of revenue for the government, In Bangladesh, as per the budget of the fiscal year 2023-24, income tax revenue target accounts for Tk. 1532.60 billion which is 34.06 percent of total tax revenue. Therefore, the first and foremost aim of income tax is to raise public revenue to meet the over increasing public expenditure, O Re-distribution of income: An effective, efficient, and fair tax system can reduce inequalities in income and wealth, This is possible by taxing rich people heavily and to confer benefit to the poorer section through progressive income tax. O Increase in savings: An effective and efficient tax system encourages people to save through providing tax credit facilities on investment allowance. O Increase in capital investment: An effective and efficient tax system encourages local and foreign investors to invest in the country through providing various facilities like tax credit facilities on investment allowance, tax holiday scheme, depreciation allowance, tax incentives etc. O Economic development: The income tax revenue can be used by the government to ensure the economic development. It can be used to build the infrastructure, to invest in social security programs, in various poverty elevation programs. As income tax plays a significant role in the economic ‘development of a country. For this reason, various reform strategies have been taken to modernize NBR. INCOME TAX IN ECONOMIC GROWTH OF BANGLADESH As it has been discussed before, taxation is one of the major sources of public revenue to meet a country's revenue ‘and: development expendittires with a ‘vie t6 accomplishing some fundamental economic and social objectives,” such” as redistribution of income, price stabilization and discouraging harmful consumption. The contribution of income tax is playing a pivotal role in the economic development of Bangladesh. The government of Bangladesh has taken; various measures to modernize the tax system and imposed various provisions in the Income Tax Act, 2023. Some of the provisions are as following: . O Tax Holiday Scheme: According to’Section 81-85 and Sixth Schedule (Part 4) of the ITA, 2023, an industrial enterprise, ‘established within prescribed time limit, in the prescribed area, for producing prescribed nature of goods, shall be exempted from tax for certain peridd i.e., five to ten years. This is known as Tax Holiday Scheme. The main objective of this scheme is to ensure economic development through industrialization attracting, investment jin some specific sectors e.g, tourism industries. ae O Accelerated Depreciation Allowance: Depreciation allowance is allowed on the new machineries used in various industries ata specified rate (50% in first year, 30% in second, and 20% in the third year for the new industries).