Advanced Taxation

Course Title:Advanced Taxation
Instructor: Muse Beyene

Course Code: ACCT 642
Reference book : Ethiopian Tax accounting – Principles

and practice
2nd Edition
By
Misrak Tesfaye Abate :
Advanced Taxation -By Muse Beyene(Asst.

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Advanced Taxation
Syllabus

Chapter 1 Overview of taxation
Definition of taxation The philosophy of taxation
Basic characteristics of modern tax
Objectives of modern taxation
Principles of taxation Principles of equity or fairness,
Principles of neutrality
Principles of efficiency,
Principles of certainty
Structure of taxation Tax base, Tax rate structure
Approaches to taxation Cost of service approach,
Benefit received approach
Ability to pay approach
Burdens of taxes Tax impact, Tax incidence, Tax shifting
Classification of taxes Direct taxes, Indirect taxes
Effect of taxation Production effect, Distribution effect,
Stabilization effect
Tax saving Tax evasion, Tax avoidance, Tax planning
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Chapter 2 Income tax in Ethiopia
Employment income tax Definition of income for taxation purpose
Sources of income for taxation purpose
Business income tax Declaration of income taxes
Recording of income taxes
Rental income tax
Income tax assessment in Ethiopia
Other income tax
Chapter 3 Property and consumption taxes

Value added tax 1.The scope of value added tax (VAT)
2.The VAT registration requirements
3. The computation of VAT liabilities
Property tax Explain property, turnover, excise, surtaxes
Turn over tax Scope of application of property, turnover,
Excise tax excise, surtaxes
Custom duty
Chapter 4 The Ethiopian tax system and its
administration
1. The current tax collection Tax collection policy in

structure in Ethiopia
Ethiopia
Reference book : Ethiopian Tax accounting –

Principles and practice
2nd Edition
By
Misrak Tesfaye Abate :

 ASSESSMENT METHODS
 Details of the assessment techniques that will be applied in the course progress are
summarized in the table below.
Assessment:
 Case study Reports/
article Review/Declaration 30%
 Term paper titled on
Ethiopian taxation system 20%
 Midterm exam 20%
 Final Exam 30%
Total 100%

First you should know about Ethiopian Fiscal year to learn
tax subject
Ethiopia has its own calendar year with 13 months
12 months with 30 days and one extra month with 5 to 6

days
Calendar year starts at Sept-11 and ends at Sept-10

Fiscal year Starts at 8th July and ends with 7th July
Ethiopia Budget
Ethiopia’s finance minister Ahmed Shide and (MoFEC) of Ethiopia
and Ethiopia finance minister proposes 386.9($13.5 billion)
billion birr for 2019/2020 budget
Out of the total 346.9 billion birr.
which is 12% higher than 2018/19’s 346.9 billion birr figure ($12.8
billion)
•Out of the total, 130.7 billion birr ($4.5 billion) will be used as
capital budget
•109 billion birr as recurrent budget (regular exp)
•140 billion birr for regional subsidy, and
•6 billion birr for the implementation of Sustainable
Development Goals (SDGs).( Global Goals)-poverty, no
hunger
Ethiopia - Tax revenue (% of GDP)
Compared to the Sub Saharan African average Ethiopia’s
tax to GDP ratio is low.
The share of Ethiopia’s tax revenue amounted only 13.3
percent of the GDP.
In comparison, in Kenya’s Tax-to-GDP ratio was 19.3
percent, which is the 2nd highest in non-oil economies
within Africa.
Ethiopia aspires to be a middle income country by 2020.

Tax revenue contribution in Ethiopia:
Taxes on goods and services (% of revenue)

17.35 %
Customs and other import duties (% of tax revenue)
45.82 %
Taxes on income, profits and capital gains (% of total
taxes) 25.58 %
Other taxes: 11.25%
.
Ethiopia - Poverty headcount ratio at national
poverty line
23.5(%)in 2015 In 2015, poverty rate at national poverty
line for Ethiopia was 23.5 %.
Poverty rate at national poverty line of Ethiopia fell
gradually from 45.5 % in 1995 to 23.5 % in 2015.
What are the Two Major policies of
any Government?

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Monetary policy :
Fiscal policy :

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 Two Major policies of Government:
 Monetary policy :
 Is a government policy which relates to the control of the
quantity of money supply and structure of interest rates in
an economy in order to regulate the economy and ensure
economic stability in the economy.
 Types of Monetary policy:
 1) Direct Monetary policy: Govt directly limits the amount
of loans that commercial banks can lend to their
customers.( It is suitable for Etiopia)
 2) Indirect Monetary policy: Indirectly controls the supply
of money or money circulating in an economy. It is applied
by many developed countries.

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 Monetary policy :
 Monetary policy attempts to maintain economic growth,
High employment and low inflation. By controlling the
supply of money and interest rates.

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Fiscal policy :

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 Fiscal policy :
 Is a segment of national economic policy which is
concerned with dcisi0ns regarding the govt expenditure. i.e
Govt spending and Taxation on income,production and
employment.
 It is used by govts to influence the level of aggregate
demand in the economy.
 In an effort to achieve economic objectives of price stability
, full employment and economic growth.
 Types of Fiscal policy:
 1) Expansionary/Loose Fiscal policy( G>T)
 G= Government spending
 T= Tax revenue
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 Fiscal policy :
 2) Contractionary/Tight Fiscal Policy(G<T)
 3) Neutral Fiscal Policy(G=T)

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PART I - INTRODUCTION
Taxation Philosophy:

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Taxation Philosophy:
1.1. Taxation, Tax definition:
According to Gupta: A tax is a compulsory levy and those who are taxed
have to pay the sums irrespective of corresponding return of services
or goods by the government.
It is levy on public by the govt.- A tax is a legal imposition in the sense

that it is levied by law
It is to be paid by public with out a definite and direct quid pro quo:
A tax levied not in return for any specific service rendered or a

commodity supplied by the governemnt for the payer.
Public can not claim something for the tax that they are paying.

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PART I INTRODUCTION
1.1. Taxation, Tax definition:
 taxation is a compulsory collection of money by government;
 “Taxes,” said rich dad. “You’re taxed when you earn.
 You’re taxed when you spend.
 You’re taxed when you do journey, buy vehicle,
 when you eat, Drink,
 You’re taxed when you save.
 You’re taxed when you die.”
“Why do people let the government do that to them?”

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 Throughout history, people have debated
 the amount and kinds of taxes that a government should
impose, as well as
 how it should distribute the burden of those taxes across
society.
 In political campaigns, candidates’ views on taxation

may partly determine their popularity with voters.
 the most important source of revenue for modern
government is tax.

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Today, tax has become a part and parcel of all
economic activities of human beings.
Every man, willingly or unwillingly, pays an
amount of money in the form of tax on the
products he uses basically.

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Taxation and Public Finance
 Taxation is defined as a system of collecting money – tax
revenue – to finance government operations.
 All governments require money to undertake different
functions. For required money – taxes – are collected
from the citizens.
 Without taxes the government could not exist.
 Initially, the government imposed taxes for three
basic purposes: to cover the cost of administration,
maintaining law and order in the country and for
defense.

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 It is the powerful instrument in the hands of the
government for transferring purchasing power
from individuals to government.
 Governments may raise or lower taxes to achieve
social and economic objectives, or to achieve political
popularity with certain groups.

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Public Finance Issues

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Public Finance Issues
 Public finance deals with the income and
expenditure pattern of the Government
 The subject matter of the public finance is
classified under five broad categories. These
are:
 Public Expenditure
 Public revenue
 Public debt
 Financial administration
 Economic stabilization
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professor) 28
Public Finance and Private Finance

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 The Private finance deals with the wants and the
satisfaction of households and firms. But the
public finance deals with the collective wants
and their satisfaction.
 The objective of both private and public finance
is similar. Private finance aims at maximizing
social welfare or social benefit by efficient use of
public goods.

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Public and Private Goods

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Public and Private Goods
 Private goods refer to all those goods and
services, which are consumed by people to
satisfy their personal and private wants or
needs.
 They relate to articles of food, clothing, shelter,
recreation, transportation, communication etc.
 These goods are priced in the market on the
basis of their cost of production on the one side
and the nature of demand on the other.

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Public Goods
 Collective wants are those which are
demanded by all members of the
community in equal or more or less equal
measures.
 Defense, education, public health,
infrastructure facilities like power,
transportation and communication, etc., are
examples of collective wants.
 Goods and services produced to satisfy
collective wants are known as public goods.
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 These goods are supplied by the country to
all its citizens.
 For example medical and educational
facilities are made available for all the
people of Ethiopia.

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Basic Characteristics of Modern taxes

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Basic Characteristics of Modern taxes
 Compulsory levy… no refusal to pay
 Levied by Government only
 Direct benefit is not the main condition (levies
without quid pro quo )… collective use
 Impose obligations – tax cannot be escaped…subject to
criminal offense
 Generally payable in money
 Lawful imposition and collection
 Involves element of sacrifice

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Basic Characteristics of Modern taxes………..
 Common interest and benefit… payers as well as non

payers will benefit.
 Regular and periodic payment… known due dates
 Harmony with national objectives… based on national
objectives
 Certain taxes levied for specific objectives… other than
simply for tax revenue

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 Why do governments bother to tax?
Alternatively, government could:
 Finance its expenditures by printing money;
 Compulsorily seize the goods or services it needs,
or
 Borrow money.
Problems with the above alternatives:

 Printing money merely debates the currency
and causes inflation; eg. Zimbabwe
 Borrowed money must be repaid or interest
bill met. Advanced Taxation -By Muse Beyene(Asst.
5/20/2021 professor) 39
or
 Borrow money.

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or
 Borrow money.

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 In Ethiopia, tax revenue –
 the principal source of government’s revenue;
 Tax revenue is generated by mainly indirect taxes
 For example in the fiscal year 2009/10 indirect

taxes raised about 70 per cent of total tax revenues
leaving the rest to direct taxes.

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1.2.1.Objectives of Modern
taxation

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1.2.1.Objectives of Modern taxation
 Objectives of taxation may differ between
developed and developing countries.
 A tax system by itself cannot be expected to

achieve all the goals fully.
 It has to fit in the overall framework of

policies and measures of the government.

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Taxation can have several objectives including:
•Revenue for the government… to finance
government expenditure such as
•Administration
•Maintaining law and order
•Defense
•Various other social services (public schools,
healthcare, social insurance, infrastructure, housing,
sanitation etc)
•Employment generation through

promotion of labor intensive techniques;

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 Removal of regional inequalities through
redistribution of opportunities (projects,
income, employment opportunities, education
etc); encouraging import substitution and export
promotion to overcome balance of payments
difficulties;
 Reducing the gap between the poor and rich-taxing
the rich and investing on projects that benefit the
poor.
 Encourage savings and investment through tax
holidays, concessions, rebates, ITC etc.

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 To discourage the consumption of harmful
products.
 To ensure economic stability or to stabilize
economy.
 To minimize income and wealth
inequalities.
 To enhance standard of living.

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Principles of Taxation ?

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Principles of taxation
 How should a tax system be designed to raise a given
amount of revenue?
 There are various criteria (principles) that can be

followed in evaluating a tax policy proposal (tax
structure);
 Principles of taxation refers to the appropriate criteria to be
employed by a country in the development and evaluation of
a good tax system acceptable by the society.
 They are basic philosophies of taxation that every country must

follow in order to design and have good tax system.

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1) Principle of Equity or Fairness
 One vital principle of a good tax system is fairness
(equity).
 The tax system to be equitable.
 Taxes imposed should be fairly and equitably
distributed.(treat each and every action in the
same or similar manner.)
 It states that a tax system should be judged on the
criterion that the distribution of tax burden by a
government among community should be fair and
effectively equal.

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1) Principle of Equity or Fairness
 Everyone agrees that the tax system should be
equitable, i.e., that each taxpayer should contribute
his/her “fair share” to the cost of government.
 But difficulties in the use of this concept arise.
 There is no such agreement about how the term “fair
share” should be defined.
There are two bases to measure how a government
could be fair in distributing burden of a tax
A) Ability to pay principle and
B) The benefit principle
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A) Ability to pay principle
 It demands the distribution of tax burden to be on the basis of
ability to pay , usually as measured by income or wealth.
 Fairness demands effectively equal sacrifice by both the rich
and the poor in support of govt.
 Same ability – same tax
 Greater ability –pay more tax
 (because the govt.
 supported you to earn more)
 It has two forms
 1)Horizontal equity,
 2) Vertical equity
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Horizontal equity
 Some economists state that Two people with same
utility before tax must have the same utility after tax.
 According to tax scholars Martin David , the horizontal
equity principle states that persons who earn equal
income and have equal savings should pay equal
amount in taxes.
 Vertical equity
This principle idea is that a tax system should distribute
the burden of tax fairly across the people in
accordance with their different abilities to pay.
It is an idea that the tax burden should increase with the
increase in taxable resource or economic capacity of tax
payer. Advanced Taxation -By Muse Beyene(Asst.
5/20/2021 professor) 53
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B) Benefit principle
 It states that taxpayers should be taxed in proportion to

the benefits they receive from the government in the
form of goods and services (public goods).
 Means the govt provides goods and services to the
members of the society and they contribute to the cost of
these supplies in proportion to the benefits they
received.

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2) Principle of Neutrality
 Principle of Neutrality:
 It states that taxation system of a country should be
neutral.(G=T)
 principle of Neutrality prohibits the Movement
from engaging at any time in controversies of a
political, racial, religious or ideological nature
 The tax system of a nation should be free from bias or
should be neutral in its effect.
 It is neutral when it full fill following conditions
 No distortion(lie or misrepresentation) on economy
 Unneutral effect on supply of factors of production
 Unneutral effect on consumer’s choice

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3. Principle of Certainty
 The tax which each individual is bound to
pay ought to be certain and not arbitrary.
 The time of payment,
 the manner of payment,
 the quantity to be paid should all be clear
to the taxpayer and to every other person.

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4.Principle of Convenience
 The mode and timing of tax payments
should be convenient to taxpayers.
 This canon(norm or principle)
recommends that unnecessary trouble to
the taxpayer should be avoided,
otherwise various ill-effects may result.

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Structure of
taxation
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Structure of taxation
 Tax base:
 Tax base or base for tax is the legal description of an
object with reference to which tax liability is computed
and payable to the govt.
 The object on which a tax is based or calculated could be the
amount of taxable income(the base of the income tax)
 The cost or quantity of production (based on excise tax)
 The value or quantity of import (the base of customs duty)
 The value of property or wealth (the base of property tax)
 The amount of invoice price(the base of expenditure tax)
 The value of gift( the base of gift tax)

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 Tax base:
 For the purpose of determining the tax liability of a taxpayer ,
the base of each type of tax
 Has to be legally defined (in a countries tax law)
 Has to quantifiable(measurable)in terms of value quantity
 Has to have a time dimension.

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Tax Rates
 Tax rate-the amount of a tax per unit of the
tax base;
 Statutory (nominal) tax rates;
(The statutory tax rate is the tax imposed by law)
 Effective tax rates-
(The effective tax rate is what percentage of our
income we actually pay in taxes.
If the statutory tax rate is 25% and I made $100,000, then
you’d expect me to pay $25,000 in taxes. However, due
to various deductions and credits, I only paid $15,000
in taxes. This means my effective tax rate is just 15%.

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Tax Rates
 Marginal tax rates;
 Average tax rates
 For example, if for an income of Br. 10,000 the tax
liability is Br. 1000 and for an income of Br. 11,000 the
tax liability is Br 1320; Average tax rates for the two
incomes:
= br. 1000/Br. 10,000 = 10%
= Br. 1320/Br. 11,000 = 12%
 Marginal tax rate would be the additional tax liability
Br. 320 divided by additional tax base namely Br.
1000 i.e., 32%.

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 Tax Rate Structure:
 the tax rate is always Based on the tax base
 athere are four commonly used tax rate structures in
taxation theory.

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Structures of taxation
 Tax Rate Structures :
 four commonly used tax rate structures in taxation theory.
1) Proportional
 2) Progressive
 3) Regressive
 4)and Digressive Tax Structures

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Proportional tax structure
 Proportional tax structure is also called a flat tax system;
 the tax liability increases in the same proportion as the increase in
income;
 the tax rate remains unchanged for each unit of the tax base;
 Under the proportional taxation, taxes are levied uniformly upon
the rich and the poor. When the tax rate remains the same, it
creates inequalities between them. However, if there is any
increase in the income of these sections, the inequalities in
distribution of income will also increase
 Example on proportional tax system
 Tax base(Br) Tax rate(%) Amount of tax (Br)
2000 10 200
5000 10 500
10000 10 1000
 In proportional taxation since by definition the average
tax rate remainsAdvanced
unchanged, the marginal rate always
Taxation -By Muse Beyene(Asst.
remains
5/20/2021
equal to the average rate.
professor) 67
Arguments for proportional tax
 Arguments for proportional tax system include:
 simple in nature;
 uniformly applicable;
 Arguments against proportional tax system
include:
 Inequitable distribution–a system of
proportional taxation would not lead to an
equitable and just direction of the burden of
taxation.
 Inadequate resources–proportional
taxation means the tax rates for the rich
and poor are the same.
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2.Progressive structure
 The tax liability as a percentage of income increases as income increases;

 If the rate rises as the tax base increases, we have progressive tax;
 If the tax rate structure is progressive, then the marginal rate would be rising as the tax
base increases;
 Under the system of progressive taxation, the tax rates go up with the increase in the
income. Thus, in this system, the inequalities in the income and wealth will be
reduced.
 Example on progressive tax structure-Employment IT in Ethiopia

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 Arguments for progressive tax structure
 Reduce the inequality of income and wealth
 Revenue productivity
 Stabilizing the economy
 Arguments against progressive tax
structure
 Ideal progression is impossible
 discouragement to work, save and invest

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Regressive tax structure
 It takes a larger percentage of income from people whose income is low;
 Under regressive taxation, the burden of taxation falls more heavily upon the
poor than on the rich.
 Regressive taxation may increase the inequalities on the distribution of income
and wealth.
 Hence, the burden of taxation is higher on the poor than on the rich. In effect,
this system widens the gap between the rich and the poor.
 Example
 Income (Br) tax rate (%) tax payable (Br)
4000 20 800
6000 15 900
10000 12 1200
20000 10 2000
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Regressive tax structure
 the tax liability is a smaller percentage of a taxpayers’
income as income increases;
 it takes a larger percentage of income from people whose
income is low;
 Example
 Income (Br) tax rate (%) tax payable (Br)
 4000 20 800
 6000 15 900
 10000 12 1200
 20000 10 2000
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Digressive Tax Rate structure
 It is similar to progressive tax rate structure in that the
marginal tax rates increase as the amount of tax base
increases
 But in a digressive tax system the average rate of
progression in a diminishing rate. That is the average tax
rate increases but at a decreasing rate.

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Approaches to Taxation

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Approaches to Taxation

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Approaches to taxation
 Taxation is not only an instrument for raising income
by a government but also a tool for administering
social justice.
 Every tax is an additional compulsory burden on a
taxpayer.
 There are various theories or approaches to justify the
distribution of burdens of taxation.
 1) The cost of service approach
 2)The benefit received approach
 3) Ability to pay approach.

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 1) The cost of service approach:
 This approach states that the basis from taxation
should be the costs incurred by the govt to provide
services for the individual taxpyers.
 Each taxpayer has to pay the tax equal to the cost of
service provided to him.
 Criticism of cost service approach.
 It is unrealistic
 It is against the objective of tax
 It may violate equity principle
 It is not fair in welfare state

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2) The Benefit Received Approach
The benefit received approach is a modified form of cost of
service approach.
According to this theory the burden of taxation should be
divided among the people in proportion to the benefits
received by them form the govt.
The persons receiving equal benefits(protection, hospitals,
education, roads, irrigation etc..)from govt. should pay equal
amount as taxes and those who receive greater benefits should
pay more as taxes than those getting less benefits.

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Criticisms or Limitations of Benefit Received
Approach
It is unrealistic
It is against definition of tax
It may violate equity of tax principle
It is semi commercial relationship

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3.The Ability to pay Approach
This approach considers the tax liability in its true form-a compulsory
payment to the state without quid pro quo. It doesn’t assume any
commercial or semi commercial relationship between the State and the
citizens.
According to this approach, a citizen has to pay taxes because, his relative
share in the total tax burden is to be determined by his relative paying
capacity.
Measurements of Ability to pay Approach
 Income
 Property or wealth
 Consumption expenditure

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Burden of taxes

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Burden of taxes
The burden of tax refers to the amount of money that a
taxpayer must pay in tax.
An important theory in public finance is the question of
“who ultimately bears the money burden of a tax.?
When tax imposed on person it is quite possible that it

may be transferred by him to a second person and
may be transferred to third person also.

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Impact of a Tax
Impact of a tax refers to the immediate or initial money
burden of a tax on a person who pays the tax in the
first instance.
It refers to the initial or immediate money burden of a
tax
It can be shifted to other person.
In other words the person who pays a tax to the
government in the first instance bears it s impact.
For example : excise tax of Br. 22,222 is levied on the
coffee importer company at import stage
Tax levied before product is been sold.

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Incidence of a tax
Incidence of tax refers to the final or ultimate resting
place of the burden of the tax payment.
It is a place where the tax is finally collected or where
the tax burden is ultimately settled.
The one who has to pay the tax can not shift to another
person.
For example: the tax payer of the coffee importer of the
company can not transfer the import tax to the whole
saler.

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Shifting of a Tax
Shifting of a tax refers to the process by which the money
burden of a tax is transferred from one person on whom
the tax is initially imposed to another person who
ultimately bears the money burden of tax.
The person on whom a tax is initially imposed may not
necessarily bear the burden of the tax.
The process of passing on the tax burden to the second
person by the first person is know as shifting of tax.
Forward shifting
Importer… to.. wholesaler…. To… retailer …to …consumer –
payment of tax .
Back word shifting is done with reduction in the price of
material and wages
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Classification of taxes

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1. Direct Taxes
2. Indirect Taxes
Direct Taxes – These are taxes that are directly paid to the government by the
taxpayer. Direct taxes are levied on individuals and organisations directly by
the government.
Note that direct taxes can’t be shifted to another. The tax payer pays directly to
the government.
The Direct Taxes in Ethiopia are divided into five categories:
 Personal income tax,
 Rental tax,
 Withholding tax,
 Business profit tax and
 Other taxes. Income From Rent Of Patent And Copyright, Income From
Winning Lottery, Income From Share In Company…etc fall under this
category.
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1. Direct Taxes
 Direct Taxes
 Personal Income Tax: progressive and ranges from 10% to 35%.
 Rental Tax: progressive for persons and ranges from 10% to 35% and 30%
flat rate on bodies.
 Business Profit Tax: progressive for unincorporated businesses and ranges
from 10% to 35% and 30% flat rate on incorporated businesses (eg. PLC,
Share Company).
 Withholding Tax: On imported goods at 3% of the sum of cost, insurance
and freight (CIF). On payments made to taxpayers at 2% on cost of supply
goods involving more than Birr 10,000 in any one transaction or contract
and services involving more than Birr 3,000in one transaction or service.
 Other Taxes (Taxes from Royalties, Income from Rendering Technical
service, Income from Games of chance, Dividends, Income from Rental of
property, Interest Income on deposits gain on trainer of certain In-properly)

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Indirect Taxes
 Indirect Taxes – These are taxes resulting from manufacturing or sale of
goods and services. They are taxes collected by an intermediary (such as a
retail store) from the person who bears the ultimate economic burden of
the tax (such as the consumer).
The main types of indirect taxes in Ethiopia applicable are:
 Value Added Tax (VAT), Customs Duty, Excise and Turn Over Taxes
 Indirect Taxes
 VAT (Value Added Tax): 15%
 Excise Tax: varies widely for different goods and one may check the separate
category for excise tax on this website.
 TOT (Turnover Tax): 2% on goods sold locally; for services 2% (two percent)
on contractor, grain mills, tractors and combine-harvesters and 10% (ten
percent) on others

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BASIS FOR
DIRECT TAX INDIRECT TAX
COMPARISON
Meaning Direct tax is referred to as the tax, Indirect Tax is referred to as the
levied on person's income and tax, levied on a person who
wealth and is paid directly to the consumes the goods and services
government. and is paid indirectly to the
government.
Nature Progressive Regressive
Incidence and Falls on the same person. Falls on different person.
Impact
Types personal income tax,
Rental tax, Withholding tax,
Value Added Tax (VAT),
Business profit tax and . Other taxes. Income From Customs Duty, Excise and
Rent Of Patent And Copyright, Income From
Winning Lottery, Income From Share In
Turn Over Taxes
Company…etc fall under this category.
Evasion Tax evasion is possible. Tax evasion is hardly possible

because it is included in the price
of the goods and services.
5/20/2021 professor) 90
BASIS FOR
DIRECT TAX INDIRECT TAX
COMPARISON
Inflation Direct tax helps in reducing Indirect taxes promotes the

the inflation. inflation.
Imposition Imposed on and collected from Imposed on and collected

and assessees, i.e. Individual, from consumers of goods and
collection Company, Firm etc. services but paid and
deposited by the assessee.
Burden Cannot be shifted. Can be shifted
Event Taxable income or wealth of Purchase/sale/manufacture of

the assessee goods and provision of
services

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Effect of Taxation

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Effect of Taxation
Effects of Taxes:
 The most important objective of taxation is to raise
required revenues to meet expenditures. Apart from
raising revenue, taxes are considered as instruments of
control and regulation with the aim of influencing the
pattern of consumption, production and distribution.
 Taxes thus affect an economy in various ways, although
the effects of taxes may not necessarily be good. There are
same bad effects of taxes too.
 Economic effects of taxation can be studied under
the following headings:

5/20/2021 professor) 93
Effect of Taxation
Effects of Taxation on Production:
 Taxation can influence production and growth. Such
effects on production are analyzed under three
heads:
 (i) effects on the ability to work, save and invest
 (ii) effects on the will to work, save and invest
 (iii) effects on the allocation of resources.

5/20/2021 professor) 94
Effect of Taxation
Effects of Taxation on Economic Stabilization;
A normal rise in price is a sign of healthy economy.
However problem arises whenever abnormal price fluctuation
are there in the economy.
These fluctuations may result in economic instability and
taxation can be used as a tool to stabilize the economy.
.i.e to control abnormal rise in price (inflationary pressure) and
falling prices (deflationary pressure)
The effects of taxation to stabilize the economy depend upon the
three economic situations.
Inflation ====Deflation =====and recession

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Tax saving—
Tax evasion
Tax avoidance
Tax planning

5/20/2021 professor) 96
Tax evasion and Tax avoidance
BASIS FOR
TAX AVOIDANCE TAX EVASION
COMPARISON
Meaning Minimization of tax liability, by taking such Reducing tax liability by using illegal
means which do not violate the tax rules, is Tax ways is known as Tax Evasion.
Avoidance.
Concept Taking unfair advantage of the shortcomings in Deliberate manipulations in

the tax laws. accounts resulting in fraud.
Legal implication Use of Justified means Use of such means that are forbidden
by law
Happened when Before the occurrence of tax liability. After tax liability arises.
Type of act Legal Criminal
Consequences Deferment of tax liability Penalty or imprisonment
Objective To reduce tax liability by applying the script of To reduce tax liability by exercising
law. unfair means.
5/20/2021 professor) 97
Tax Planning
 Tax Planning
 Tax planning is the process of forecasting one's tax
liability and formulating ways to reduce it.
 Exercise undertaken to minimize tax liability through the
best use of all available allowances, deductions, exclusions,
exemptions, etc., to reduce income and/or capital gains.

5/20/2021 professor) 98
Thank you

5/20/2021 professor) 99

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Course Title:Advanced Taxation

Instructor: Muse Beyene

Reference book : Ethiopian Tax accounting – Principles

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Chapter 3 Property and consumption taxes

1. The current tax collection Tax collection policy in

Reference book : Ethiopian Tax accounting –

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Ethiopia has its own calendar year with 13 months

12 months with 30 days and one extra month with 5 to 6

Calendar year starts at Sept-11 and ends at Sept-10

Ethiopia aspires to be a middle income country by 2020.

Taxes on goods and services (% of revenue)

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

It is levy on public by the govt.- A tax is a legal imposition in the sense

A tax levied not in return for any specific service rendered or a

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

 In political campaigns, candidates’ views on taxation

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

 Common interest and benefit… payers as well as non

Advanced Taxation -By Muse Beyene(Asst.

Problems with the above alternatives:

Problems with the above alternatives:

Problems with the above alternatives:

 Tax revenue is generated by mainly indirect taxes

 For example in the fiscal year 2009/10 indirect

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

 A tax system by itself cannot be expected to

 It has to fit in the overall framework of

Advanced Taxation -By Muse Beyene(Asst.

•Employment generation through

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

 There are various criteria (principles) that can be

 They are basic philosophies of taxation that every country must

Advanced Taxation -By Muse Beyene(Asst.

Advanced Taxation -By Muse Beyene(Asst.

 It states that taxpayers should be taxed in proportion to

Advanced Taxation -By Muse Beyene(Asst.