Sessions 04_Classification and Choice of Taxes

8/2/2019 Sessions 04_Classification and Choice of Taxes

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Course No. 4135:Course No. 4135:

KeyWords/Outline

TaxationTaxation

Classification and Choice of TaxesClassification and Choice of Taxes

Tax Structure in BangladeshTax Structure in Bangladesh


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Issues to be discussed:Issues to be discussed:

Classification Taxes

Choice of Taxes between

- Proportional and Progressive taxes- Direct and Indirect taxes

Tax Structure in Bangladesh


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Classification of TaxesClassification of Taxes

Basis Classification

Number oftaxes

Single tax:when a country has only one tax.Multiple tax:when a country has more than one tax.

Impact and

incidence oftaxes

Direct tax: when both the impact and incidence of tax fall on

same person or entity (e.g., income tax, gift tax, etc.)Indirect tax:when the impact and incidence of tax fall ondifferent persons or entities (e.g., VAT, customs duty, etc.)

Structure oftax-rates

Proportional tax: when the tax increases (decreases) at aconstant rate with the increase (decrease) in tax-base

Progressive tax:with increase (decreases) in tax-base, if the taxincreases (decreases) at a higher (lower) rate than the rate ofincrease (decrease) in the tax-baseRegressive tax:with increase (decreases) in tax-base, if the taxincreases (decreases) at a lower (higher) rate than the rate ofincrease (decrease) in the tax-base


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Tax-Base (Tk.) Total Tax (Tk.) Marginal Tax Rate

10,000 1,000 10%

20,000 2,000 10%

30,000 3,000 10%

40,000 4,000 10%


10,000 1,000 10%

20,000 2,500 15%

30,000 4,500 20%

40,000 7,000 25%


10,000 1,000 10%

20,000 1,900 9%

30,000 2,700 8%

40,000 3,300 6%

Propor-

tional

Tax

Progre-

ssive

Tax

Regre-

ssive

Tax


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Subject-matter oftaxes

Personal tax: when tax is imposed on person or entityIn rem tax:when tax is imposed on goods, services, or property(i.e., other than on person or entity)

Elasticity oftaxes

Elastic tax: when a tax produces more revenue with increase in taxrate and/or tax-baseInelastic tax:when a tax produces equivalent or lower revenue withincrease in tax rate and/or tax-base

Classifi-cation oftax-bases

Tax on income:when tax is imposed on income of the taxpayerTax on wealth:when tax is imposed on wealth of a taxpayer being the owner

of the wealthTax on transaction:when tax is imposed on the value of a transaction or onthe quantity of goods or services under a transaction may be ad valoremtaxif imposed on the value of a transaction, orspecific tax(orunit tax)ifimposed on the quantity of goods or services transactedTax on people:when a tax is imposed per capita head/poll tax


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Increase ordecrease inpublic

revenue

Positive tax:when a tax contributes positively towardsthe national exchequer real taxNegative tax:when a tax contributes negatively

towards the national exchequer transfer payments

Collector oftaxes

Central tax: when a tax is collected by a centralgovernmentLocal tax:when a tax is collected by a local

government


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Choice of Taxes:

Proportional vs. Progressive Taxes

Choice of Taxes:


Proportional Tax Progressive Tax

1. Complexity in deciding upon a precise andappropriate degree of progression, andproportional tax is considered as betteralternative

1. Does not effect the relative position of thetaxpayers

1. Simplicity and uniformity1. Willingness to work more and save more of

the taxpayers not adversely affected as in caseof progressive tax

1. Neutral tax in terms of allocation of resourcesof the economy to different uses

1. Principle of equality justified on the groundthat money burden of tax increases in thesame proportion as the tax-base increases

1. Consistent with the ability-to-payprinciples

1. Contribution to economic growth andstability

1. Powerful instrument for reducingeconomic inequality

1. Minimizing aggregate sacrifice1. Economical from the viewpoint of

collection, as the collection cost does notrise with the increase in tax rates

1. Elastic tax system and public revenuecan be raised at any time by increasingthe tax rates and vice versa.

1. Best alternative to proportional tax

Arguments in favour


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Choice of Taxes:


Choice of Taxes:


Arguments againstProportional Tax Progressive Tax

1. Numerous tax collection points andadministrative unmanageability and noteconomical

1. Not consistent with the just and equitable

distribution of tax burden, as it falls more heavilyon the poor than on the rich1. Widens the inequality of the distribution of

income and wealth1. Possibility of being less revenue-yielding, since

the tax rate for the rich and the poor is same andthe State cannot obtain from the richer sections of

the community as much they can give1. May cause to social instability, because it is

regressive in terms of real burden and oppressiveto the poor

1. Cannot be an elastic tax system, if the tax rate forthe small income-earner is already heavy

1. Fear of communism by the anti-Communists (as per CommunistManifesto, graduated income tax proposedto achieve a transfer of capital from the

bourgeoisie to the proletariat)1. Disincentive to work more and also tosave and invest and thus possibility ofadverse effect on production and capitalformation

1. Political irresponsibility (possible increasein government spending for more tax; &

impossibility of taxing the richerminority )

1. Excessive complexity (subdivision of tax-base; unintended high tax for an inordinateslab)

1. Possibility of very great efforts to evade asteeply graduate tax


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Choice of Taxes:

Direct vs. Indirect Taxes

Choice of Taxes:

Direct vs. Indirect TaxesDistinctions

Point Direct Tax Indirect Tax

1. Impact andincidence

In this case, both impact andincidence lie on same person orenterprise.

In this case, persons/enterprises on whom/whichimpact falls, they try to shift the incidence onothers and hence, usually impact and incidence lieon separate persons or enterprises.

2. Subject-matter Direct taxes are usually personaltaxes. Indirect taxes are usuallyin rem

taxes.

3. Elasticity oftax

If direct tax is progressive, then itis also elastic.

Indirect taxes are usually inelastic.

4. Tax-base Usually, the tax-bases of directtax are income, wealth or people

(in case of poll tax).

Usually, the tax-bases of indirect tax aretransactions and production.

5. Taxcollectioncost

Collection cost of direct tax isusually high due to evadingtendency of taxpayers.

Incidence usually falls on consumers and hence theproducers/sellers collect the tax from buyers/consumers for Govt. & collection cost is low.

6. Equity In reality, direct taxes are

progressive and hence, largelyequitable.

Indirect taxes are usually regressive and hence,

inequitable.


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Choice of Taxes:


Choice of Taxes:

Direct vs. Indirect TaxesArguments in favour

Direct Tax Indirect Tax

1. Usually progressive.1. Redistribution of income and wealth in

favour of lower earning group.

1. Revenue increases with the increase ofincome (productive).1. Anti-inflationary.1. Easy to determine impact and incidence of

tax.1. Educative value to taxpayers by generating a

feeling of economic consciousness in themind of people.

1. Certainty ensured since the taxpayers arealarmed in advance about the amount ofdirect tax, timing and mode of its payment.

1. Advantageous to pay andcomprehensive tax payment.

1. Voluntary.

1. Does not make any harm towork-effort and initiative.1. Flexible.1. Can be used for special

purpose.1. Tax-evasion is list possible.


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Choice of Taxes:


Choice of Taxes:

Direct vs. Indirect TaxesArguments against

Direct Tax Indirect Tax

1. Disincentive effect against motivation1. Stops or discourages work-effort and

initiative

1. Encourages tax-evasion and tax-avoidance

1. Discourages domestic and foreigninvestment

1. High collection cost

1. Reduces savings1. Narrowness of scope1. Unpopular

1. Regressive1. Penalizes certain consumption1. Does harm to concerned

industry1. Increases price1. Difficult to determine the

impact of incidence of tax


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Slide 1-12Tax & Nontax Revenues in

Bangladesh

Tax & Nontax Revenues in

Bangladesh

Tax Revenue Non-Tax Revenue

NBR Portion1. Taxes on Income and Profit2. Value Added Tax (VAT)3. Import Duty4. Excise Duty5. Supplementary Duty (SD)6. Other Taxes and Duties

1. Dividend and Profit2. Interest3. Administrative Fees and Charges4. Fines, Penalties and Forfeiture5. Receipts for Services Rendered6. Rents, Leases and Recoveries7. Tolls and Levies8. Non-Commercial Sales9. Defence Receipts

10. Other Non-Tax Revenue and Receipts11. Railway12. Post Offices13. Telegraph and Telephone Board14. Capital Revenue

Non-NBR Portion1. Narcotics and Liquor Duty2. Taxes on Vehicles3. Land Revenue4. Stamp Duty (Non Judicial)


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Slide 1-13Tax Structure of BangladeshTax Structure of Bangladesh

*Other NBR Taxes and Duties + Land Revenue + Stamp Duty

Types of TaxesBudget 2010-11 Revised 2009-10 % Increase over

Tk. (mn) % Tk. (mn) % FY10R

Direct Tax 239,830 31.54 192,501 30.10 24.59

Taxes on Income and Profit 210,050 27.62 165,600 25.89 26.84

Other Direct Taxes* 29,780 3.92 26,901 4.21 10.70

Indirect Tax 520,594 68.46 447,060 69.90 16.45

Border Taxes 258,350 33.97 232,801 36.40 10.97

Domestic Taxes 262,244 34.49 214,259 33.50 22.40

Total Taxes 760,424 100.00 639,561 100.00 18.90

Tax-GDP Ratio 9.75 9.26

Revenue-GDP Ratio 11.90 11.51

Budget 2010-11 & Revised Budget 2009-10

Direct Tax 28.60% Indirect Tax 71.40%

Tax-GDP Ratio 9.03% Revenue-GDP Ratio 11.25%

2008-09

(Revised Budget):


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Tax Structure of BangladeshTax Structure of BangladeshBudget 2010-11 & Revised Budget 2009-10

Tax Revenue Budget 2010-111 Revised 2009-10 % Increase over

FY10RNBR Portion Tk. (mn) % Tk. (mn) %

Taxes on Income and Profit 210,050 27.62 165,600 25.89 26.84

Value Added Tax (VAT): 270,864 35.62 227,890 35.63 18.86

VAT on Imports 114,684 15.08 102,000 15.95 12.44

VAT on Domestic Goods and Services 156,180 20.54 125,890 19.68 24.06

Turnover Tax (TT) 60 0.01 60 0.01 ---

Import Duty 108,847 14.31 104,300 16.31 4.36

Excise Duty 2,750 0.36 2,610 0.41 5.36

Supplementary Duty (SD): 128,659 16.92 104,850 16.39 22.71

SD on Imports 34,819 4.58 26,501 4.14 31.39

SD on Domestic Goods and Services 93,840 12.34 78,349 12.25 19.77

Other Taxes and Duties: 4,670 0.61 4,690 0.73 -0.43

Travel Tax 4,668 0.61 4,678 0.73 -0.21

Other Taxes & Duties 3 0.0003 13 0.002 -80.00Sub-Total: NBR Portion 725,900 95.46 610,000 95.38 19.00


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Tax Structure of BangladeshTax Structure of Bangladesh

Budget 2010-11 & Revised Budget 2009-10

Tax RevenueBudget 2010-111 Revised 2009-10 % Increase

overFY10RTk. (mn) %

Tk. (mn) %

Sub-Total of Taxes: NBR Portion 725,900 95.46 610,000 95.38 19.00

Non-NBR Portion

Narcotics and Liquor Duty 714 0.09 600 0.09 19.00

Taxes on Vehicles 8,700 1.14 6,750 1.06 28.89

Land Revenue 5,490 0.72 3,921 0.61 40.01

Stamp Duty (Non-Judicial) 19,620 2.58 18,290 2.86 7.27

Sub-Total: Non-NBR Portion 34,524 4.54 29,561 4.62 16.79

Total Tax Revenue 760,424 100.00 639,561 100.00 18.90

Non-Tax Revenue 168,049 155,253 8.24Total Revenues 928 473 794 814 16.82


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End of the PresentationEnd of the Presentation

Thank you.

Sessions 04_Classification and Choice of Taxes

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