What is taxation? What are the principles of taxation?

Taxation is a term for when a taxing authority, usually a government, levies or imposes a
financial obligation on its citizens or residents. Paying taxes to governments or officials has been
a mainstay of civilization since ancient times.
Taxation can be also known as imposition of compulsory levies on individuals or entities by
governments. Taxes are levied in almost every country of the world, primarily to raise revenue
for government expenditures, although they serve other purposes as well.
 Taxation occurs when a government or other authority requires that a fee be paid by
citizens and corporations, to that authority.
 The fee is involuntary, and as opposed to other payments, not linked to any specific
services that have been or will be provided.
 Tax occurs on physical assets, including property and transactions, such as a sale of
stock, or a home. 
 Types of taxes include income, corporate, capital gains, property, inheritance, and sales.
Some principles of taxation are as follows:
• Neutrality: Taxation should seek to be neutral and equitable between forms of business
activities. A neutral tax will contribute to efficiency by ensuring that optimal allocation of the
means of production is achieved. A distortion, and the corresponding deadweight loss, will occur
when changes in price trigger different changes in supply and demand than would occur in the
absence of tax. In this sense, neutrality also entails that the tax system raises revenue while
minimizing discrimination in favor of, or against, any particular economic choice. This implies
that the same principles of taxation should apply to all forms of business, while addressing
specific features that may otherwise undermine an equal and neutral application of those
principles.
• Efficiency: Compliance costs to business and administration costs for governments should be
minimized as far as possible.
• Certainty and simplicity: Tax rules should be clear and simple to understand, so that taxpayers
know where they stand. A simple tax system makes it easier for individuals and businesses to
understand their obligations and entitlements. As a result, businesses are more likely to make
optimal decisions and respond to intended policy choices. Complexity also favors aggressive tax
planning, which may trigger deadweight losses for the economy.
• Effectiveness and fairness: Taxation should produce the right amount of tax at the right time,
while avoiding both double taxation and unintentional non-taxation. In addition, the potential for
evasion and avoidance should be minimized. Prior discussions in the Technical Advisory Groups
(TAGs) considered that if there is a class of taxpayers that are technically subject to a tax, but are
never required to pay the tax due to inability to enforce it, then the taxpaying public may view
the tax as unfair and ineffective. As a result, the practical enforceability of tax rules is an
important consideration for policy makers. In addition, because it influences the collectability
and the administer ability of taxes, enforceability is crucial to ensure efficiency of the tax system.
• Flexibility: Taxation systems should be flexible and dynamic enough to ensure they keep pace
with technological and commercial developments. It is important that a tax system is dynamic
and flexible enough to meet the current revenue needs of governments while adapting to
changing needs on an ongoing basis. This means that the structural features of the system should
be durable in a changing policy context, yet flexible and dynamic enough to allow governments
to respond as required to keep pace with technological and commercial developments, taking
into account that future developments will often be difficult to predict.
When is a person resident in Nepal? What do you mean by public expenditures?
A person is a resident in Nepal when an individual meets the requirement according to Income
Tax act of Nepal, which are as follows:
 The person is present in Nepal for 183 days or more in the 365 consecutive days
 The person is an employee of Government of Nepal posted abroad at any time during the
income year
 The person’s normal place of adobe is in Nepal.
Public expenditures are the spending of the government raised from tax revenue to provide
facilities and services to the general public such as infrastructure, healthcare, law enforcement,
and civil services
In order to carry on their functions, governments must obtain the services of labor and other
factor units and (except in a completely socialist economy) acquire goods produced by private
business firms. Public expenditure consists of expenditure by central government, state
governments and local authorities (such as municipalities and public corporations), with central
government accounting for the major portion of such expenditure. Thus, the state is required to
maintain good roads, bridges, defense activities, canals and harbors, to protect trade, to maintain
the coinage and to provide social security, education and religious instruction
Ms. Shruti has a salary income of Rs. 9, 00,000 p.a. in the year 2076/77. She retired in the
end of the year and received Rs. 25, 00,000 as retirement payment.
Her contribution to Approved Retirement Fund for the year was Rs. 80,000. She also paid
a life insurance premium of Rs. 40,000 for the year. Calculate her income tax liability for
the income year 2076/77?
Solution
Assessed as Resident
Individual Amount Rs.
Basic salary 9,00,000
Add: Retirement Payment 25,00,000
Gross Taxable Income 34,00,000
Less: Deductions:  
Approved retirement Fund 80,000
Life insurance premium 25,000
Net Taxable Income 32,95,000
Therefore Shruti’s net/total tax liability for the income year 2076/77 is Rs.9, 10,200.
Calculation of tax liability
Tax on Rs.4,00,000 @1% 4,000
Tax on Rs.1,00,000 @10% 10,000
Tax on Rs.2,00,000 @20% 40,000
Tax on Rs.13,00,000 @30% 3,90,000
Tax on Rs.12,80,000 @36% 4,66,200

(4,000+10,000+40,000+390000+46620
Tax liability on Rs.3280000 = 0)
= Rs.9,10,200
John, a citizen of UK, arrives Kathmandu on 5 th Ashad 2077 and returns on 20 Magh
2077. What is residential status of John in the income year 2076/77 and 2077/78?
A citizen of UK, namely John arrives at Kathmandu on 5th of Ashad 2077 and returns back on
20th of Magh 2078.
So the total number of days he stayed in Nepal are counted as below –
For the Income year 2076/77 = 5th of Ashad to 31st of Ashad
= 27 days
For the Income year 2077/78 = Shrawan to Magh (20th)
= Shrawan, Bhadra, Asoj, Kartik, Mangsir, Poush, Magh
= 30+30+30+30+30+30+20
= 200 days
As John only stayed for 27 days in the Income year 2076/77, therefore he is not counted as a
resident of Nepal. But John stayed for 200 days in the Income year 2077/78, therefore he is
counted as resident of Nepal because according to Income Tax Act of Nepal, any person who is
present in Nepal for 183 days or more in the 365 consecutive days is counted as a resident.
So in a year or a continuous time period of 365 days, John stayed in Nepal for 227 days.