TOPIC A

GENERAL TAXATION THEORY

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TOPIC A COVERAGE:
After studying topic A, you should be able to:
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2.

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Define tax and describe tax Characteristics. Describe general tax classification and Tanzania tax structure Discuss the role of taxation in an economy. Explain basic efficiency criteria for evaluating tax systems. Provide a historical overview of tax legislation and administration in Tanzania.
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1…………….DEFINING TAX…………2 Taxation has a long history
 Back in Bible ancient days Jesus Christ taught his disciple the importance of, and He himself paid tax to the Roman Empire (Mark 12: 14-17, “…render to Caesar the things that are caesar’s…”).  Has existed since the birth of early civilizations.

It is part of the price to be paid for living in an organized society.
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2……………..DEFINING TAX………….2
Tax is a compulsory (not voluntary) levy (charge) by the state on her citizens and non-citizens alike that is usually payable in monetary form for which governments need not offer equivalent direct compensatory services or render an individual account on how it has utilized the revenue.

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1…………TAX CHARACTERISTICS……3
1.
 

It Is a compulsory charge.

Not contribution, donation or gift to the state Legally imposed, and non-compliance results into statutory, civil & criminal penalties. Therefore not voluntary

2.
 

Only government (sovereign state) has power to levy taxes.

Sports clubs, churches, political parties do not charge taxes. Distinguishing factor btn tax & other charges: who levies/charges?

3.

 

Both citizens and non-citizens may be liable to pay tax.
citizen – individual with full rights as member of a country Depending on the legal provisions, anyone may be liable to pay taxes. e.g. non-resident – difficulty to escape paying indirect taxes.

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2…………TAX CHARACTERISTICS……3
4.
   

No “quid pro quo” relationship in taxation.

Not necessary for a tax payer to derive direct equivalent benefits for tax paid. Benefits defuse through general society or specific classes/groups in the society. Exception – user charges. e.g. tax paid 105,000/= & expect 105,000/= medical services from the government. Not real as you may not fall sick or be abroad for studies in the year of income.

5.

 

Government does not have an obligation to provide an individual account of how tax is utilized. Does not mean no public control over how government expenditure e.g. political system provide check & control mechanism.

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3…………TAX CHARACTERISTICS……3
6. 


7.

Usually payable in monetary terms. Coins & paper money Normally of the currency of the state concerned The power of taxation is mainly to be used in collecting state revenue.

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1….…..General Tax Classification……8

Four categories of classifying taxes 1. By tax base 2. According tax incidence shiftability 3. According to unit or ad-valorem based taxes 4. According to how the tax burden is distributed among the taxpaying society.
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2………General Tax Classification…..8 1. Tax base.
 classifying a tax according to what is being taxed.
 

 good for economic analysis but sometimes it is difficult to define the tax base.

income (e.g. corporate tax, PAYE, etc.) capital (capital gain tax, property tax – assets & liabilities realization [ITA, 2004 Part III, Div. III], etc.) consumption (e.g. value added tax).

e.g. capital gain – sale of shares or sale of buildings - inflation?, time value of money?

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3………General Tax Classification…..8
2.

Shiftability of tax incidence.

a. Direct tax - levied directly on the person who is intended to pay the tax without the possibility of shifting the incidence to another person.

tax impact and incidence fall on the same point.  tax impact – legal requirement to pay tax (formal incidence) & tax incidence – actual effect/burden for paying tax  e.g. income tax, estate duty, property tax, capital gain tax. b. Indirect tax – incidence falls on another person than the one paying the tax (tax impact)

e.g. taxes on consumption of goods/services – VAT, excise duty.

This classification is sometimes misleading as the incidence of some direct taxes, for example corporate tax, can easily be shifted.
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4………General Tax Classification…..8
 A.

• B.

Factors that determine the shiftability of tax incidence. Market structures Imperfect – monopoly, product differentiation, imperfect communication – easy to shift incidence Perfect – many buyers/sellers, full knowledge, no restrictions – difficulty to shift. Industry cost condition/structure • Increasing – difficulty to shift • Constant – possible • Decreasing – easier to shift

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5………General Tax Classification…..8

Factors that determine the shiftability of tax incidence.

C.

Price elasticity of product demand

Elastic – small change in price leads to great change in demand – less possibility of shifting Inelastic – change in price leads very little change in demand – very high possibility of shifting
D.

Type of tax. Indirect – more possibility of shifting Direct – not easy to shift (tax authority identify and charge tax direct to the tax payer

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6………General Tax Classification…..8
3.

Unit (specific) v/s ad-valorem based taxes.

A unit or specific tax - levied on the physical measures of what is being taxed (e.g. volume, weight, etc.). Many excise duties are specific taxes, for example tobacco tax is charged by weight of tobacco. ad-valorem tax is levied on the value of the tax base, for example income tax is charged on the level of income, VAT on consumer expenditure, import duty.

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7………General Tax Classification…..8
4.

Distribution of tax burden.

i. Progressive taxes - take an increasing

portion as the value of the tax base rises and depends on the marginal rate of tax (MRT*) being greater than the average rate of tax (ART**). *MRT = Change in tax paid Change in income **ART = Total tax paid

Total income

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8………General Tax Classification…..8
4.

Distribution of tax burden.

ii. Proportional taxes - take a constant

proportion as the value of the tax base and depend on the MRT and ART being equal.

e.g. all tax payers paying 10% of their income.

iii.Regressive taxes - take a declining

portion as the value of the tax base rises and depends on the MRT being less than the ART.

e.g. flat rate taxes on consumption – excise duty & VAT for essential goods.

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1………TAX STRUCTURE IN TANZANIA….5

Basically made up of direct taxes and indirect taxes. Ministry of Finance determines tax structure and classification in Tanzania. Direct taxes are mainly taxes on income and property while indirect taxes are on consumption and international trade.
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2……..TAX STRUCTURE IN TANZANIA……5
DIRECT TAXES – ON INCOME AND PROPERTY Corporate Tax - 30% for all companies (whether resident or non-resident) carrying on a business in Tanzania. Individual Income Tax - Non-corporate resident taxpayers who include sole traders and salaried employees are taxed at progressive individual income tax rates, which vary from the lowest marginal rate of 18.5% to the highest marginal tax rate of 30%. The total income of a non-resident individual for a year of income shall be taxed at the rate of 20 percent. Skills and Development Levy - a tax based on the gross monthly emoluments paid by an employer to employees.
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3………TAX STRUCTURE IN TANZANIA……5
DIRECT TAXES – ON INCOME AND PROPERTY Game of Chance and Gambling Tax - charged to Casinos, private Lotteries and Slot Machines.

Withholding Taxes - a scheme (basically, not a tax in itself) that is operated on a number of payments made by persons in the course of doing business/investments [e.g. investment income, etc.]

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4……..TAX STRUCTURE IN TANZANIA…….5
INDIRECT TAXES – ON CONSUMPTION AND INTERNATIONAL TRADE Excise Duty on Locally Manufactured Goods levied on a few locally manufactured goods, which include, beer, wines, whiskies, spirits, soft drinks, smoking tobacco, cigarettes and petroleum products. Stamp Duty - Certain legal instruments attract payment of stamp duty for the purpose of authenticating them. Value Added Tax (VAT) - a consumption tax charged on VAT registered traders for goods and services at a standard rate of 20. Other Internal Taxes - fees, levies and user charges, which are collected from various sources. e.g. taxes and charges on motor vehicles, port and airport departure services.

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5……..TAX STRUCTURE IN TANZANIA…..5
INDIRECT TAXES – ON CONSUMPTION AND INTERNATIONAL TRADE Taxes on Motor Vehicles Motor Vehicle Registration Tax Transfer Tax - On transferring the ownership of a motor vehicle the new owner pays a transfer tax. Port and Airport Departure Service Charge Import Duty-Generally known as customs duties. These are tariffs, which are imposed on goods coming into the country. Excise Duty on imports - Excise duty is charged either on specific or ad-valorem tax rate on certain consumer goods on importation into the country.

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1………THE ROLE OF TAXATION……4 Paying taxes is inevitable for the provision of social welfare. The rationale for imposing taxes stems from the government responsibility towards its citizens

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2………THE ROLE OF TAXATION……4
1. 

Raise revenue - a primary objective of a modern taxation system to help finance public expenditure. To provide “public goods” - displays the following characteristics
 zero marginal cost, i.e. no extra cost is incurred in supplying the good to more than one person.  Individuals cannot be excluded from consuming the good, even if they have no desire for it.  All members of society must consume the same amount, it cannot be rejected, e.g. law and order.  e.g. national defense - the provision of national defense protects all members of society from hostilities at zero marginal cost, no individual can be excluded and those who disagree in principal cannot reject it.  free market would be inefficient.
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3………THE ROLE OF TAXATION……4
1.

Raise revenue - a primary objective of a modern taxation system to help finance public expenditure.

To provide “merit good” in order to promote social and economic welfare.  Paternalistic role of providing merit goods, e.g. health and education.  Can be provided privately, but if left completely to market forces, merit goods may be under-consumed.
Redistribution of income and wealth.  reduce poverty and promote social equality.
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2.

4………THE ROLE OF TAXATION……4
3.

Economic regulator - promoting economic welfare and creating a sound infrastructure for businesses.
 Maintenance of economic stability
To avoiding high levels of inflation and unemployment Taxation is used as an instrument of economic policy – by manipulating changes in the tax system, a desired policy objective may be achieved.

 Protection of consumers, employees and general public.

Therefore, taxation can be a powerful tool in the hands of any government as a means of ensuring that the social, political, and economic goals are achieved.
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 Correction of regional economic imbalances. incentives to industries being established in economically less developed areas.

Legislation and regulatory controls made on producers in order to protect consumers, employees and the general public is the responsibility of any socially aware government. e.g. protect the infant local industries from foreign competitors.

THE ECONOMIC EFFECT OF TAXATION Reduces disposable income. Controls inflation. Transfer wealth from persons to the state. May lead to tax avoidance or tax evasion. It reduces consumption especially on elastic goods, for inelastic goods consumption may be affected for a short time only. May lead to incentive/disincentive to work.
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1….…..Tax System Efficiency Criteria…….6

Rationale for imposing taxes Government responsibility towards its citizens
    Provision of “public goods” Provision of “merit good” Redistribution of income & wealth Economy regulation

Maintenance of economic stability Protection of consumers, employees & general public. Correction of regional economic imbalances
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2………..Tax System Efficiency Criteria…….6

Tax system adopted must be acceptable to the general public to avoid dissension.

Unfair or seemingly unfair taxation systems have been at the heart of many social conflicts, examples:
  social unrest caused by the introduction of community charges in the UK in 1990. 14thc. peasant revolt in UK due to introduction of poll tax.

Adam Smith (1776) - The wealth of Nations, proposed & later extended by others – good tax system:
   reflect a persons ability to pay, It should be certain, convenient, and administratively efficient and Do not cause economic distortion.

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3……….Tax System Efficiency Criteria…….6
1.

Simple, Certain and Convenient.
• • •

2.

Elasticity of Tax To Changes In The Tax Base (Flexibility) – measures sensitivity of tax system to economic Administratively Efficient (Economy).
   

Simple – tax payer self assessment is possible and being aware of sanctions (penalties) for non-compliance. Certain – yield expected revenue for implementing government plans, e.g. profit tax (relative uncertain) v/s PAYE or tax on necessities (more certain). Convenient – timing and method of payment/collection, e.g. PAYE & withholding taxes are more convenient.

changes. Elastic when the amount of revenue it yields increases as fast as or faster than the growth of income or the economic activities. e.g. most direct taxes are elastic. 3. Cost to TRA – administrative (manpower & other material resources) Cost to TP – compliance (professional tax advice etc.) Costs can be monetary (wages, salaries, equipments, etc.) or nonmonetary (reduction in income, consumption & any other inconveniencies. increased compliance costs may results into increased evasion practices & increased costs to enforce compliance.
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4………..Tax System Efficiency Criteria….6
4.

Neutrality – does not distort economic choices caused

• • •

(distortion caused by excessive burden of taxation, causing substitution effects resulting in economic inefficiency. cost of working = loss of leisure time, and the benefit is the income received in wages Economic welfare = material income + psychic benefit received from leisure. A tax wedge is the difference between the marginal cost of the activity and the marginal benefits received. The degree of distortion depends on the size of the tax wedge.

When taxation enters the equation, distortions may occur due to Income & substitution effects of tax

on work effort.  Income effect: reduce disposable income – encourages to work harder  Substitution effect: choice btn work & leisure  IE & SE work on opposite direction & when IE is greater than SE – work harder (otherwise, results into leisure than working harder)
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5………Tax System Efficiency Criteria……..6 5. Equitable (Horizontal & Vertical).
• •

To be acceptable taxes must be fair & seen to be fair. Tax systems perceived not to be equitable results into greater tendency towards tax evasion.
a. b.

Traditional approaches:
a. b.

Horizontal equity – requires that people in similar situations be treated in a similar manner. Vertical equity – requires that people in an unequal situations be treated with the „necessary degree‟ of inequality. Require the rich to pay more than the poor = progressive system of taxation. Benefit theory – levied in proportion to benefit received (limitation - difficulty to measure benefit) Ability to pay theory – equality of sacrifice among TPs (limitation – what is the best indicator of ability to pay?)

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6………….Tax System Efficiency Criteria…..6 CONCLUDING REMARKS

Not possible for any one tax system to conform to all principles of an „ideal‟ tax.


• • •

Which principle is to be the most important is a matter of judgement and policy/politics. Be careful not to evaluate a tax system on these criteria in absolute terms but in relative terms. Most important is the degree to which they are achieved and how important tax is in the system as a whole.

e.g. in the pursuit of simplicity equity is often reduced, provisions for taxpayers in different situations can only be achieved by increased legislation, thereby making the system more complex. Also equity may only be achieved at the expense of efficiency.

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HISTORICAL OVERVIEW OF TAXATION IN TANZANIA

 

Most of Tanzanian laws including tax law were inherited from Tanganyika colonial masters (The United Kingdom). After First World War (1914-1918) Tanzania was put under the British Government. By the time Kenya and Uganda were already under the British rule. 1937 – Income Tax Law was introduced in Kenya as a war measure 1940 – IT law was introduced in Tanganyika, Uganda and Zanzibar by way of territorial ordinance. 1948 – the four ordinances were consolidated after the formulation of the East African High Commission (EAHC).

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HISTORICAL OVERVIEW OF TAXATION IN TANZANIA

1952 – the consolidation resulted into the East African Income Tax Management Act, 1952 (EAITM Act, 1952). With retrospective effect from January 1st 1951. Each territory retained its own powers under the EAHC to enact its own ordinance, fixing the rates of tax and personal allowances. 1958 – another Act was enacted to replace the EAITM Act, 1952 - East African Income Tax Management Act, 1958 (EAITM Act, 1958).
The EAITM Act, 1958 continued to form the base of taxation for sometime even after the following events:
  

The East African Common Services (EACS) replaced the EAHC, Tanganyika became politically independent in 1961, and The 1964 Zanzibar Revolution.
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HISTORICAL OVERVIEW OF TAXATION IN TANZANIA

i.
ii. 

1970 – following the signing, and start of the East African Community (EAC) in 1967, the EAITM Act 1958 was revised on the authority of the EAC Act No. 3 of 1968. The result was the East African Income Tax Management Act, 1970 (EAITM Act, 1970 – revised edition). The consolidation of income tax legislation in East Africa had clear advantages derived from: Economy of scale, and Uniformity of procedures, training, and tax policy formulation. December 1973 – the East African Income Tax Department was split up.
  each country assumed responsibility for the running of its own independent Tax Department. The Income Tax Act No. 33 of 1973 (ITA, 1973) received President Assent on 30th December 1973 and it became effective law on January 1974.
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HISTORICAL OVERVIEW OF TAXATION IN TANZANIA

Prior to 1996 – tax administration in Tanzania was under three departments namely the Income Tax department, Customs and Excise Department and Sales Tax and Inland Revenue Department. Since 1996 – Tanzania has continuously been reviewing the tax structure.
   

to look at the number of taxes in the tax system and reduce them where necessary. Review the rate structure of the various taxes and the tax base in general. The ITA, 1973 was recently replaced (w.e.f. 1st July 2004) by the Income Tax Act, 2004. Other tax legislation included Sales Tax Act, 1969 which was repealed and re-enacted to Sales Tax Act, 1976 and later replaced by Value Added Tax, 1997 (VAT, 1997), Estate Duty Act, 1963 (already abolished), Customs Tariff Act, 1976, etc.

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HISTORICAL OVERVIEW OF TAXATION IN TANZANIA

Like in other tax systems, taxation in Tanzania is divided into three major areas namely – Tax Policy, Tax law, and Tax Administration
1.

Major Areas Of Taxation:

The government decides on a tax policy. A tax policy is a general statement (plan) or understanding which guide or channel thinking of the government on how tax matters are going to be decided.
2.

Tax Policy.

The policy is then put into law by the government‟s legislative body (the parliament) by enacting Acts, e.g. the ITA, 2004.
3.

Tax Law.

Tax Administration: Tax law is passed over to a revenue authority, e.g. TRA in Tanzania. TRA is has the main authority to administer taxes & supposed to transform tax policy and tax law into compliance.
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CURRENT TAX ADMINISTRATION IN TANZANIA

ASSIGNEMNT ON THE FOLLOWING:  TRA establishment (when and why?).  TRA functions  Overview of its current TRA organization structure, its departments and their respective functions.  Local Government Taxes.  Tax Administration in Zanzibar:

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The End!
Thank you
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…NEXT???NEXT…

TOPIC B: Introduction to Income Taxation

(ITA, 2004)

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