Fundamentals of Taxation

Introduction

Is it pain ?
Is it mandatory?
Is it obligatory ?
Fundamentals of Taxation
Nothing is Certain But Death and Taxes
A rather philosophical and mocking proverb. It draws on the actual
unavoidability of death to highlight the difficulty in avoiding the
burden of taxes.
Origin
Several famous authors have uttered lines to this effect. The first
was Daniel Defoe, in The Political History of the Devil, 1726:
"Things as certain as death and taxes, can be more firmly
believed."
Benjamin Franklin (1706-90) used the form we are currently more
familiar with, in a letter to Jean-Baptiste Leroy, 1789, which was
re-printed in The Works of Benjamin Franklin, 1817:
"'In this world nothing can be said to be certain, except death and
taxes."
Fundamentals of Taxation
Tax is the Cost of Civilization

In 1927 in the court case of Compañía General

deTabacos de Filipinas v. Collector of Internal
Rvenue Supreme Court Justice Oliver Wendell
Holmes, Jr. expressing the idea:
- Taxes are the price we pay for a civilized
society.
- Taxes are the price we pay for civilization.
- I like to pay taxes. With them I buy civilization.
Fundamentals of Taxation
Tax is the Cost of Civilization
Interestingly, this basic sentiment was expressed multiple times over a
period of decades before Holmes wrote it. Although the wording used was
variable. For example, in 1852 a committee appointed by the governor of
Vermont wrote a report for the legislature which included the following:
Taxation is the price which we pay for civilization, for our social, civil
and political institutions, for the security of life and property, and
without which, we must resort to the law of force.

In 1848 a committee report to the State Senate of Ohio emphasized that

taxation paid for “social order” :
Rightful taxation is the price of social order. In other words, it is that
portion of the citizen’s property which he yields up to the government
in order to provide for the protection of all the rest. It is not to be
wantonly levied on the citizen, nor levied at all except in return for
benefits conferred
Fundamentals of Taxation
Tax is the Cost of Civilization
In 1863 a committee report to the New York legislature spoke of the
“requirements of civilization” [JSNY]:
If we are correct in the position that taxation is the price or penalty
exacted by the requirements of civilization and the necessity of regulated
liberty of thought, action and property, we cannot but conclude that such
price or penalty should be as light as possible compatible with the ends in
view;
In 1866 a book titled “Christian Ethics or The Science of Duty” suggested
that
Taxes are used to assure “life and property” A man’s taxes are what he
pays for the protection of his life and property, and for the conditions of
public prosperity in which he shares. He ought to pay his just portion of the
expense of government.
In 1884 Chatfield in publication “Day’s Collacon” offered “glory” as a
rationale for taxation [DCCH]:
Taxes are what a nation pays for glory.
Fundamentals of Taxation
Tax is the Cost of Civilization
In 1903 taxes were connected to the goal of “remaining civilized” by Albert
Bushnell Hart :
Taxation is the price which civilized communities pay for the
opportunity of remaining civilized.
In 1916 the State School Supervisor of Georgia argued for the use of taxes
to support schools. He invoked a concise version of the quotation under
Investigation
Taxation for schools is American and democratic. “Taxation is the price
of civilization.” “Only the savage pays no taxes.”
In 1918 an article in the periodical Forum by Perley Morse said :
Taxes are the price of development and civilization, and it is worth it.
Fundamentals of Taxation
Tax is the Cost of Civilization

Tax is payment made to the Government of a country

without “quid pro qui” i.e. nothing in return.

Tax is the amount which is collected by a sovereign

authority i.e. the Government duly empowered by its
legislature to defray the expenses of the Government.

It is the means of the Government in increasing its revenue

under the authority of the law, purposely used to promote
welfare and protection of its citizenry.
Fundamentals of Taxation
Definition of Tax

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.
Fundamentals of Taxation
Definition of Tax

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
repulsive by means of felicitous definition of “Taxes’ as the
payment for civilization.
Considering the comments , 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
Reasons to Fell Good About Taxes
Taxes protect us from fire, ensure our safety when we are in home or in
street, provide us with education facilities, provide with health care
facilities, ensure legal safe guards, arrange avenues for physiological
refreshment(parks, Play grounds), in short Taxes provide us benefits every
hour of the day, every day of the year.
All residents of Bangladesh receive substantial amount in public service
each year .
Past generation paid taxes for all the amenities what we have today. Our
taxes of today allow us to pass along those benefits to our future
Generation
If, we refrain from paying tax or pay less tax resulting propounding the
solution of economic problems today, the solution will become more
expensive tomorrow
Fundamentals of Taxation
Reasons to Fell Good About Taxes
Taxes payment will ensuring softening disparities of wealth in the society.
Taxes payment ensure to build and maintain required infrastructure
education, healthcare, power, communication to attract foreign investment
in the country.
Taxes ensure regulated business environment to protect rights of the
consumers and investors.
Taxes ensure the people of a country to do things together and to built the
nation with joint effort.
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 are 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
continuing their efforts to make the
system simple and tax payer friendly.
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. No tax system that does not satisfy this
basic condition can be termed 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
Classification of Taxes: Direct Tax
A direct tax is a tax paid by a person on whom it
is legally imposed. In direct tax, the person
paying and bearing tax is the same. It is the tax
on income and property. Examples of direct taxes
are:
#Income Tax # Vehicle Tax # Expenditure Tax
#Property Tax # Interest Tax# Gift Tax etc.
Fundamentals of Taxation
Classification of Taxes: Direct Tax
Advantages

Direct tax is equitable as it is imposed on person as per the

property or income.
Time, procedure and amount of tax paid to be paid is known
with certainty.
Direct tax is elastic. The government can change tax rate
with the change in the level of property or income.
Direct tax enhances the consciousness of the citizens.
Taxpayers feel burden of tax and so they can insist the
government to spend their contributions for the welfare of
the community.
Fundamentals of Taxation
Classification of Taxes: Direct Tax
Disadvantages

Direct tax gives mental pinch to the taxpayers as

they have to curtail their income to pay to the
government.
Taxpayers feel inconvenience as the government
impose tax progressively.
Tendency to evade tax may increase to avoid tax
burden.
It is expensive for the government to collect tax
individually.
Fundamentals of Taxation
Classification of Taxes: Indirect Tax
An indirect tax is a tax imposed on one
person but partly or wholly paid by
another. In indirect tax, the person paying
and bearing tax is different. It is the tax on
consumption or expenditures. Examples of
indirect taxes are:
VAT #Entertainment Tax #Excise Duty #Sales Tax
#Hotel Tax #Import And Export Duty etc.
Fundamentals of Taxation
Classification of Taxes: Indirect Tax
Advantages
Indirect tax is convenient as the taxpayer does
not have to pay a lump sum amount for tax.
There is mass participation. Each and every
person getting goods or services has to pay tax.
There is a less chance of tax evasion as the
taxpayers pay the tax collected from consumers.
The government can check on the consumption of
harmful goods by imposing higher taxes.
Fundamentals of Taxation
Classification of Taxes: Indirect Tax
Disadvantages
Indirect tax is uncertain. As demand fluctuates, Tax
will also fluctuate.
It is regretful as the tax burden to the rich and poor
is same.
Indirect tax has bad effect on consumption,
production and employment. Higher taxes will reduce
all of them.
Most of the taxes are included in the price of goods or
services. As result, taxpayers do not know how much tax
they are paying to the government.
Fundamentals of Taxation
Classification of Taxes: Comparison
Direct Tax and Indirect Tax

The tax, which is paid by the person on whom it is levied is

known as the Direct tax while the tax, which is paid by the
taxpayer indirectly is known as the Indirect tax. The direct
tax is levied on person’s income and wealth whereas the
indirect tax is levied on a person who consumes the goods
and services.
The burden of the direct tax is transferable while that of
indirect tax is non-transferable.
The incidence and impact of direct tax falls on the same
person, but in the case of indirect tax, the incidence and
impact falls on different persons.
Fundamentals of Taxation
Classification of Taxes: Comparison
Direct Tax and Indirect Tax

The evasion of tax is possible in case of a direct tax if the

proper administration of the collection is not done, but in
the
case of indirect tax, the evasion of tax is not possible since
the amount of tax is charged on the goods and services.
The direct tax is levied on Persons, i.e. Individual, HUF
(Hindu Undivided Family), Company, Firm, etc. On the other
hand, the indirect tax is levied on the consumer of goods
and services.
The nature of a direct tax is progressive, but the nature of
the indirect tax is regressive.
Fundamentals of Taxation
Classification of Taxes: Comparison
Direct Tax and Indirect Tax

Direct tax helps in reducing the inflation, but the indirect tax
sometimes helps in promoting the inflation.
Direct tax is collected when the income for the financial year
is earned or the assets are valued at the date of valuation.
As against this, the indirect taxes are collected, when the
purchase or sale of goods or services are rendered.
Direct tax is imposed on and collected from the assessee.
Unlike indirect tax is imposed on and collected from
consumer but deposited to the exchequer by the dealer of
goods or provider of services.