Theoretical
foundation
Unit 1 : Introduction corporate tax
• Tax is compulsory contribution from a
person to the government to defray the
expenses incurred in the common interest of
all with out reference to special benefit
conferred
• RA Seligman
Meaning of • Taxes are general contribution of wealth
levied upon natural person, or corporate to
tax defray the expenses incurred in conferring
common benefits upon residents of states
• Plehn CC
• Tax is the price, individuals pay the
government for the law and order (Hughes,
2020)
• Reporting requirements means that the taxpayer
files all required tax returns at the proper time and
the returns accurately report tax liability in
accordance with the Internal Revenue Code,
regulation, and court decisions applicable at the
time the return is filed(Roth, 1989)
Tax • The taxpayer should follow a few basic rules for fully
complying with the tax law, report the real tax base
compliance to the tax authorities, compute the tax liability,
correctly file the tax return on time, and pay the
amounts due on time(Freanzoni , 2000)
• Tax compliance directly links with tax law
enforcement, defiance will increase if a large per
centage of taxpayers are successful in their non-
compliance efforts(Brederode, 2020).
Principles of taxation
Equity and Fairness : Horizontal and Vertical Equity
Certainty : Imposed on certain time
Convenience : Maximum Convenient time
Economy : Tax collection cost should be less than tax amount
Productivity : Spend tax money in Productive sector
Elasticity : Tax amount should be higher in case of tax reduction
Diversity : Tax imposed in various sectors
Neutrality : No effect on economic activities due to the tax /equitable in form of business
Simplicity : tax should be simple
Revenue Generation
Redistribution of income and wealth
Objectives of
Maintain and promote social justice
taxation
Maintain and promote economic justice
Maintaining the economic stability
Direct tax
• Tax paid by the person who bear the tax burden, Not
shifted to others, Income and property based tax
• Direct taxes, levied directly on incomes, profits and
wealth, including income tax, national insurance
contributions, corporation tax, petroleum revenue
tax and inheritance tax
Types of tax
Indirect tax
• Tax partly and wholly paid by the other consumption
based tax, turnover based tax
• Indirect taxes on expenditures (therefore levied
indirectly on incomes etc.), including value added
tax, customs and excise duties on tobacco and
alcohol
Indirect tax
Advantages Paid by all
Convenience
Less evade, regulate economy
disadvantages of
Diversity
Advantages and
Not discourage activities
Use for specific performance, regulate for
Indirect tax
consumption
Disadvantages Rise Price
Regressive
Not civic sense
Uncertain
Direct tax
Advantages Equitable
Certainty
Economical
disadvantages of
Advantages and
Elastic
Productive
Rise civil awareness
Indirect tax
Disadvantages Discourage hand work and saving
Reduce investment
Evasion
Arbitrary
Difficult collect / less flexible
Tax culture
Tax culture defined as "the entirety of all relevant formal and informal institutions connected with the national
tax system and its practical execution, which are historically rooted within the country's culture, including the
dependencies and ties caused by their ongoing interact
Taxes not only the tax system and the actual tax practice form part of a country's tax culture, but also the
unique relationship between the tax authorities and the taxpayers accounts of its uniqueness (Frey and Holler
1998)
With regard to tax authorities, the structure of the individual levels’ competencies must be taken into account
• How will be determined the distribution of public revenues between central and local government?
• How explicit and precise is the tax law in this respect and how consequently are violations sanctioned?
• How concise are the tax laws? What is the remedy in case of their unfulfillment?
• Are there any interest groups that may favorize certain tax reform? Which (rival) interest groups do exist?
• All these dilemmas are essential component from the national tax culture, especially in transitional economies
Tax culture continue
• Tax culture is an expression of human spirituality and creativity which
relates to refined and educated tax systems
• Tax culture is perceived not only from the aspect of the tax system
and the current tax laws and practices, but also from the perspective
of undergoing interactions between the tax administration and the
taxpayers
• Spitilar said that: Taxation is influenced by economic, social, cultural,
historical, geographical, psychological and further differences
prevailing in the individual countries and their societies.
Tax culture continue
• Tax culture particularly as tax consciousness on the side of taxpayers.
• There isn’t any country where people are happy to pay taxes, but they do pay taxes
because of their tax culture Georgi Boos
• It shows the embeddedness of the actors in the national culture with its subset of tax
culture
• Cultural norms and historically developed institutions both determine the tax code.
The latter sets the environment and the constraints, i.e. the rules for the tax game.
Players include (among others) taxpayers, politicians, tax officials, experts (e.g. tax
advisors), and academics
• It consists of only three groups of actors: the government, the tax authority, and the
taxpayers. We will assume that academics and advisors only change the actors' level
of information.
Tax morale and dimension
• These institutional and socioeconomic factors do have influence on the citizens tax moral:
• People with religious believes are more inclined towards paying taxes
• Woman have shown that have higher awareness regarding the tax morale
• Younger people are more creative in justifying tax evasion then old people
• Educated people have more positive approach in aspect of paying taxes
• Part-time workers and the self-employed have lower tax morale than full-time employees.
• The results from the institutional determinants conclude that the government support from the public, the institutions and
transparency had been beneficial in accomplishing larger tax compliance
• The people with support for democratic society incline to be against tax cheating and consider it as inexcusable.
• The trust in government by the people is considered as vital factor in achieving high tax morale. Individual who understand and
support fiscal redistribution as a fundamental concept of modern democracy, i.e. the policy to tax the rich with higher rates and
fund the poor is such kind of elevation in tax morale.
• Also, there is enhanced link between people with high tax morale and those who show displeasure after claiming benefits they
don’t deserve. This link emphasizes the doubtful relation between tax paying and the peoples presumptions of tax usage
Tax culture
• The economic effects of taxation may be
discussed from five points of view:
1. They may be influenced by the novelty or the
Economic inequality of the tax.
2. They may be proportionate or disproportionate
Effect of to the tax
taxation 3. They may be intended or unintended.
4. They may be neutral or injurious.
5. They may be direct or indirect.
Seligman
• High marginal tax rates can discourage work, saving,
investment, and innovation, while specific tax
preferences can affect the allocation of economic
resources
• Tax cuts can also slow long-run economic growth by
Economic increasing deficits.
• The long-run effects of tax policies thus depend not only
Effect of on their incentive effects but also their deficit effects
• A tax is neutral when it meets the following
taxation
characteristics
• It does not modify the decisions of economic
agents in the application of the production factors
• It does not create an effect of replacement or
alteration in the production factors
• These aspects indicate that its purpose is to collect
resources
• Influencing incentives : taxes can affect both supply and
demand factors
• Reducing marginal tax rates on wages and salaries,
for example, can induce people to work more
• Lower marginal tax rates on the returns to assets
(such as interest, dividends, and capital gains) can
encourage saving
• Reducing marginal tax rates on business income
Incentives can cause some companies to invest domestically
rather than abroad
• Tax breaks for research can encourage the creation
of new ideas that spill over to help the broader
economy
• Higher taxes collected from the result can
distribute the low income earners
• Income tax has a role in redistributing income
and offsetting more regressive taxes, such as
excise duty and indirect tax
• Two conflicting effects of higher tax
• Substitution effect. Higher tax leads to lower
wages – and work becomes relatively less
attractive than leisure.
• Income effect. Higher tax leads to lower wages,
then a worker need to more to maintain his
target level of income
Incentives • Therefore, the income effect means that
higher tax may mean some workers feel the
need to work longer.
• The Laffer curve is an analysis which suggests at
some tax rates, higher income tax will reduce
incentives to work and actually leads to lower tax
revenue
Laffer curve
Tax culture
• Tax can vary between countries. Generally, less developed economies
have a lower tax burden, more developed economies have a higher
tax burden
• Sweden and the US have similar levels of GDP per capita, but the tax
burden in Sweden (45%) is nearly double the US (25%). This reflects
the more extensive welfare state (free health care, education) in
Sweden than the US
• Less developed economies, the tax burden tends to be lower because
of difficulties in collecting taxes and less developed economic and
political institutions.
Indirect tax
• A rise in excise duty or VAT can lead
to price increases. Therefore, it
tends to cause cost-push inflation
• A higher tax on a good and services
causing higher price and less
demand
• The logic of taxes on demerit goods
and goods with negative
externalities is to make consumers
pay the social cost of the goods
Effect of Income tax
• The effects of reducing income tax rates
• Increase spending : Low income tax rate, High saving and high
spending
• Higher Economic Growth : Low tax encourage spending resulted
high consumption and High aggregate demand and higher economic
growth
• High Government borrowing. Tax cuts, lead to lower tax revenue
and higher borrowing
• Higher productivity. Lower income tax rates may encourage people
to work longer. Overtime is more worthwhile
• Target income by working fewer hours, Therefore, tax cuts may not
increase labour supply because people don’t need to work more if
work is more highly paid.
Income tax act 2002
• Income tax introduced in 1951 AD from budget speech
implemented in 1958
• The income tax act replaced Income tax act 1974(2031)
• Recent Income act 2058 (2002) enacted from Chaitra 19
(1 April 2002)
Major feature of
Income tax act 2002
• Broad based tax system : incorporated all income within
tax bracket including capital gain
• Classification of Income : Income from Business,
Investment and Employment
• Global Tax system : Determine taxable income including
the all sources of Income.
• Progressive tax system : High tax rate in High income
• Taxes on worldwide income and Sourced Income
• Taxation on capital gain
Taxes on retirement Income
Self assessment tax system
Quantification of Income
Major feature of Foreign Tax credit system
Income tax act Accounting based tax system
Provision of administrative review system
2002 Classification of assets (Pool based depreciation)
Integrated tax incentives Provision
Presumptive and turnover tax system
Tax Payment situation
• The paying taxes index showed that position of Nepal at 175 whereas the rank of Bhutan,
China, India, Sri Lanka is 15, 105, 115, 142 among the 190 economies
• The time required for the tax payments is 377 hours
• The number of tax payments of Nepal was 46 as comparison other territories South Asia
26.9 and OECD countries 10.31 (WBG, 2020).
• The tax office classified large taxpayers with more than 120 million as large taxpayers
have been contributing more 60 per cent internal revenue
• 70 per cent of internal revenue has been collected from Kathmandu valley, and
remaining from the outside of the Kathmandu valley.
Status of tax compliance in Nepal
Tax Practices
The corporate sector compliance is also poor less than 20 per cent of companies are active in the
tax office
The number of zero returns and credit returns is high compared to debit returns
The IRD defined the debit return that deposits tax to government treasury collecting VAT, Credit
return who claims VAT from government and zero return as no transaction return
The debit, credit and zero return size are 13, 50 and 30 per cent
The credit amount is higher than the debit amount from the last couple of years
Status of non-filer: debit filer, credit filer and
zero return
