* Books Recommended: 1. Taxation in Bangladesh (Theory & Practice), Fourteenth Edition: Dr. Monjur Morshed Mahmud, Kumar, Milon, Rahman 2. INCOME TAX MANUAL PART: 1 3. INCOME TAX MANUAL PART: 2 4. Paripatra 2020-21 5. Harvey S. Rosen : Public Finance, 7th Elton 6. Jhon F. Due and Ann F, : Government Finance * Public finance In public finance we study the finances of the Government. Thus, public finance deals with the question how the Government raises its resources to meet its ever-rising expenditure. According to Dalton, “Public finance is concerned with the income and expenditure of public authorities and with the adjustment of one to the other.” Prof. Otto Eckstein writes “Public Finance is the study of the effects of budgets on the economy, particularly the effect on the achievement of the major economic objects—growth, stability, equity and efficiency.” * Importance of Public Finance 1. Economic growth: 2. Price stabil 3. Economic stability: Equitable distributior 5. Proper allocation of resources: 6. Balanced development: 7. Promotion of export: 8. Infrastructural development:1. Economic growth: Government finance is important to achieve sustainable high economic growth rate. The government uses the fiscal tools in order to bring increase in both aggregate demand and ‘aggregate supply. The tools are taxes, public debt, and public expenditure and so on. 2. Price stability: The government uses the public finance in order to overcome form inflation and deflation. During inflation it reduces the indirect taxes and general expenditures but increases direct taxes and capital expenditure. It collects internal public debt and mobilizes for investment. In case of deflation, the policy is just reversed. 3. Economic stability: The government uses the fiscal tools to stabilize the economy. During prosperity, ‘the government imposes more tax and raises the internal public debt. The amount is used to repay foreign debt and invention. The internal expenditures are reduced. During recession, the case is just reversed 4, Equitable distribution: The government uses the revenues and expenditures of itself in order to reduce inequality. If there is high disparity it imposes more taxes on income, profit and properties of rich people and on the goods they consume. The money collected is used for the benefit of poor people through subsidies, allowance, and other types of direct and indirect benefits to them. 5. Proper allocation of resources: The government finance is important for proper utilization of natural, manmade and human resources. For it, on the production and sales of less desirable goods, the ‘government imposes more taxes and provides subsidies or imposes taxes lightly on more desirable g00ds. 6, Balanced development: The government uses the revenues and expenditures in order to erase the ‘gap between urban and rural and agricultural and industrial sectors. For it, the government allocates the budget for infrastructural development in rural areas and direct economic benefits to the rural people. 7. Promotion of export: The government promotes the export imposing less tax or exempting form the ‘taxes or providing subsidies to the export oriented goods. It may supply the inputs at the subsidized prices. Itimposes more taxes on imports and so on. 8. Infrastructu rastructures. It has to keep peace, justice and security too. It has to bring socio-economic reformation ‘too. For all these things it uses the revenues and expenditures as fiscal tools. I development: The government collects revenues and spends for the construction of Public revenues ‘The revenues from different sources recelved by the government are called public revenues. Some are regularly collected whereas some are irregularly collected. Some of them are obtained from the sale of public utilities whereas some are obligatory payments to the government, ‘The public revenue can be classified into -A. Tax revenue and B._ Non tax revenue: + Public Revenues (Cont.) A. Tax revenue: 2. Indirect taxes: B. Non tax revenue 1. Fees: Fines and penalties: 3. Royalties: 4,Toll: 5. Grants and donation: 6. Unclaimed properties : ‘Tax revenue: The tax is compulsory payment to the government. The government does not repay back it ‘to the payers nor does it do anything for the personal benefit to the payers. Itis very effective fiscal tool essential for the achievement of different socio-economic objectives. There are mainiy two types of tax, 1. Direct tax: The taxes imposed in income, profit and properties are called direct taxes. The tax that is not shiftable in nature and paid by the payers who really take its burden is called direct tax. The taxes posed in income, profit, and, houses, vehicles etc are called direct taxes. 2. Indirect taxes: Indirect tax is shiftable in nature. The person or organization which faces the incident of tax is different from person or organization who really takes the burden of tax. The incident is faced by the producers and traders but the burden is taken by the final consumers. The tax is imposed on. production, sales, export and imports etc. The taxes like excise duty, custom duty, entertainment tax, etc are indirect taxes. The VAT is also called indirect tax ‘Non tax revenue: 1, Fees: The government receives the money from the sale of different services like health, education etc. Moreover it takes fees for registration, license etc. The examples of fees are education fee, health fee, registration fee (birth, death, marriage, organization etc) license fee (driving, share broker, export, import] ete. 2. Fines and penalties: Against the violation of rules and regulations the government charges the fines but if there is violation of law and order government charges penalties. Fines and penalties are not regular source of government revenue.3. Royalties: The government receives the royalties its production right, copy right, public land and building, capital equipment and plants for use to others. It obtains dividends from public enterprises, rents from public properties etc. this is also regular source of public revenue. 4, Toll: The government collects different types of toll ike road toll, poo! toll etc in order to recover he construction cost and to reach the fund for maintenance of the construction. 5. Grants and donation: The government receives the grants and donations from the people, business organization, NGOs, within the country or outside the country. It obtains grants from foreign ‘government too. 6. Unclaimed properties : The nationalized properties of people after the death being unclaimed are called unclaimed properties. This is irregular source of government revenue, * Public Expenditures Public expenditure is spending made by the government of a country on collective needs and wants such as pension, provisions (such as education, healthcare and housing), security, infrastructure, etc. Generally public expenditure is classified into development expenditure and administrative expendit ‘The government allocates resources through its ministries, departments and local authorities. These re. ‘types of expenditures are made either for their own maintenance or for the promotion of social welfare of the people, * Objectives of Public Expenditure 1. To maintain law and order; 2. To maintain national security 3. To provide administrative services; 4, To invest in social overheads like transportation, communication, irrigation, energy, education , health, security; 5. To ensure economic equity in the society; 6. For development and promotion of basic and strategic industries; * Classification of public expenditure:1. Development expenditures: 2. Expenditure on public utilities: 3. Defense expenditure: 44, Expenditure on general admi ration: 5. Conservation of resources: 6. Preservation and renovation of monuments: 7. Payments of public debts and interest : 8, Miscellaneous expenditure: 2. Development expenditures: Expenditures on the construction of infrastructures of transportation, communication, sanitation, irrigation, education, health, power, energy etc is called development expenditure 2. Expenditure on public utilities: After the construction of infrastructures the government spends the money to provide facilities of education, sanitation, drinking water, communication, transportation ete, these expenditures are expenditure on public utilities. 3. Defense expenditure: The expenditure on arms and armaments to protect the country and the people from foreign aggression is called defense expenditure ‘4. Expenditure on general administration: For the good governance, to keep peace, security and justice ‘the country, the government makes the expenditures through different s, departments and constitutional bodies etc. These expenditures are called general administration expenditure 5. Conservation of resourc fo avoid reduction in the quantities and qualities of the resources and for their sustainability the government makes expenditures on their conservation. it includes expenditure con forestry, soil fertility management, irrigation, etc. 6. Preservation and renovation of monuments: For the preservation of culture, traditions, arts, skills of ‘the people of the country the government makes the expenditure. The government spends the money also to renovate the historical, archaeological, religious monuments, 7. Payments of public debts and interest : 8, Miscellaneous expenditure: * Difference between private and public financeTax ‘Acompulsory contribution to state revenue, levied by the government on workers" income and business profits, or added to the cost of some goods, services, and transactions. Benjamin Franklin once said, "Nothing is certain but death and taxes.” According to Justice Holmes, “ The price paid to the Govt. for living in a civilized society Is the tax.” According to Taylor, “Taxes are the compulsory payments to Govt. without expectation of direct benefit to the tax payer. In Bangladesh, the principal taxes are: + Customs Duties, + Value-Added-Tax (VAT), + Supplementary Duty and + Personal income taxes and corporate income taxes etc, * Characteristics of Tax 1. tis compulsory levy under ta 1g Act. 2. itis generalized for indirect tax and direct tax. 3, Tax payers cannot claim direct and proportionate or equivalent service for payment of tax. 4, Its a price paid to government for living in a civilized society. 5. tis the main stay of government revenue. * Objectives of Tax 1. Source of govt. revenue 2. Redistribution of income: 3. Economic control: 4, Protection of home industry: 5. Economic development: 6. Employment:7. Raising national income at desired level: * Types of Taxes 7 types of taxes: 1. Income Taxes: 2. Property Taxes: 3. Consumptive Taxes: 4. Corporate Taxes: 5. Payroll Taxes: 6. Capital Gains taxes 7. Inheritance or Estate Taxes: 1. Income Taxe: are subject to deductions and tax credits; they are usually not paid by people under a certain income or ‘who have special situations such as a disability, hese taxes are paid out by anyone who earns an income by any means. Income taxes 2. Property Taxes: These are paid by anyone who owns property such as land, a home or commercial real estate. These taxes are often collected by the state or local govt. to help fund their budgets. While income taxes are subject to deductions or credits, these taxes are often fairly rigid. Licensing fees on cars, recreational vehicles are property taxes as well. 3. Consumptive Taxes: These are taxes on sales goods or items that are subjected to being used by either an individual or business. While everyone understands that a small amount of money is added on. to the purchase of goods in the stores, many people overlook other taxes. A fishing or hunting license is a tax. Toll road fees are a tax, even if they call it a user fee. 4. Corporate Taxes: All business structures pay taxes on the income made in that particular business. ‘Tax consequences are important when structuring a business. For example, sole proprietorships will pay ‘their taxes through their regular income taxes. 5. Payroll Taxes: These taxes are taken out by the businesses before income is distributed to the individual in exchange for the work that was done. 6. Capital Gains taxes : Capital Gains taxes are paid on investments that have appreciated. Frequently these investments have been sold. Examples would be stocks, bonds, and real estate,7. Inheritance or Estate Taxes: Of the 7 types of taxes, this is the only type where a tax can happen because of a death. A certain amount of estate money that may be passed on with no tax consequence. Once that level is met, however, the taxes are usually quite steep. Life insurance is often used to offset inheritance taxes. * Direct Tax ‘The taxes imposed in income, profit and properties are called direct taxes. The tax is not shiftable in nature and is paid by the payers who really take its burden. The payers know how much they are paying at what rate and on what basis. Therefore, this taxis inconvenient and unpopular type of tax. But it isa very effective tool applied for price stability, redistribution of income and wealth, economic stability, reallocation of resources ete. * Advantages of direct tax Advantages of direct ta: 1. Certainty: 2. Based on ability to pay: 3. Uniform: 4, Less collection cost: 5. Educative: 6. Redistributive: 7. Anti inflationary: 8, Reallocative to more desirable sector : 1. Certainty: There is certainty in collection of tax from direct tax. The government can easily estimate ‘the amount of tax that it can collect in the coming fiscal year. 2. Based on ability to pay: The direct taxes are imposed on the basis of “ability to pay” of the people and organization. The people and business organizations earning more profit, income pay more taxes then the counterparts. 3. Uniform: The people and business organization belonging to a certain group are imposed equally. Rate of tax is uniform in al places and to everyone.4. Less collection cost: Bearing little cost of collection, huge amount can be collected. Less time and manpower is required for tax collection. 5, Educative: The payers of direct tax know how much they are paying, why should they pay and ‘whether the government is utilizing the money or not. 6, Redistributive: Direct tax is very useful to redistribute income and wealth if there is high inequality. For it, the rich people are imposed taxes in income, profit and properties heavily and the amount collected is used for the benefit of the poor people. 7. Anti inflationary: If there is inflation, the government absorbs the money with people increasing direct tax rate. It helps to control the increase in aggregate demand and rise in price level 8, Reallocative to more desirable sector : he direct tax is helpful to reallocate the resources form non, or less desirable sector to more desirable sector. For it, the government imposes more profit tax in the profit earned from the production of such non or less desirable product like tobacco, alcohol ete. * Disadvantages of direct tax 2. Inconvenient or burden 2: Less flexible 3. Unpopular: 4, Corruption: 5. Anti producti 1 Inconvenient or burden : The payers of direct tax know how much they are paying on what basis or ‘on what rate per unit of time they are paying. The direct taxes are paid in large amounts. Therefore, the payers feel inconveniency or burden, 2. Less flexible: Only if the direct tax is decreased, itis welcomed and accepted by large number of people. When it is increased the government may encounter serious political pressure, 3. Unpopular: The direct tax is unpopular tax. It is inconvenient and less flexible. It is not diversified like lirect tax. Due to direct tax, the government may encounter serious political pressure too. 4. Corruption: In order to avoid the payment of large amount of direct tax, the officials and political leaders are offered bribes. ‘The direct tax may be anti productive. Because its burden makes people not to work hard, There may be decrease in production, investment and income generation.* Terminology ‘Taxation: The system that a government uses for collecting money from people inthe form of taxes. Income tax: A tax based on your income that you pay to the government. Progressive tax: A tax system in which people who earn alot of money pay a larger Percentage of their income in tax than people who earn less Regressive tax: Tax system in which poor people pay a bigger percentage of their income ‘than rich people. Property tax: Tax that you pay based on the value of the land and buildings you own. Road tax: Money that people must pay if ‘they want to drive their vehicles on public roads. Sales tax: A tax that is added to the basic price of something you buy. ‘Stamp duty: A tax that people pay on some official documents, especially when they are buying a house, land. Surtax: An additional tax on something on which you already pay tax, especially a high income. ‘Tariff: A tax that a government charges on goods that enter or leave their country. Value added tax (VAT): A tax on goods and services. A value-added tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. Capital gains tax: A tax that you pay on the profit you get from selling property or from money you have invested. Corporation tax: A tax that companies pay on their profits Duty: A tax that you must pay on somett ‘one country from another country. i that you buy, or on something that you bring into ‘Customs Duty : The taxes that you pay on goods that you bring into a country. Excise: A tax that a government charges on services used and ‘goods sold inside its country,Difference between Excise Duty and Custom Duty ‘Superfically, both excise and custom duty are taxes levied by the government but the major difference between the two is that excise is the tax levied by the government on the goods manufactured in the country while customs duty is a tax levied upon goods imported in to the country from foreign countries.