BUSINESS AND FINANCE

Accounts and Budget service level IV

UNIT OF COMPETENCE: ADMINISTER LEVIES, FINES AND OTHER

TAXES

MODULE TITLE: ADMINISTERING LEVIES, FINES AND OTHER

TAXES

MODULE CODE: BUF ACB4

2011 E.C

Learning out come

Lo1. Assess liability for payment of levies, fines and other taxes

Lo2. Determine account payable

Lo3. Deal with enquiries and complaints

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Lo1. Assess liability for payment of levies, fines and other taxes

We should know the role of the government to enable us to appreciate the

importance of government sector. Government of a modern state generally
undertakes the following functions:

1. Security - Both external and internal involving outlay for military, police
and other protective services.
2. Justice or settlement of disputes
3. The regulation and control of economy – including the services such as
coinage,
a. weights and measures, the business practices , operation of public
sector
b. undertakings

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 4. Of social and cultural welfare through education, social relief, social
insurance, health and other activities.
5. Conservation of natural resources.
6. Promotion of the unity of the state by control of transportation and
communication.
7. Administration and financial system, government revenue expenditure and
fiscal control.
8. Education and employment.
9. Housing.
10.Public health.
11.Upliftment of weaver sections of the society.
12.Restore social justice in the society.
Functions of modern governments are broadening due to socio-political reasons.
Therefore, to discharge these increasing functions, the government has to increase
its expenditure. To meet out the enormous amount of expenditure it has to
mobilize funds with the help of public finance policy. Hence public finance has
developed into an important branch of economics.

1.3 Scope of Public Finance

Public finance deals with the income and expenditure pattern of the Government.
Hence the substances concerned with these activities become its subject matter.
The subject matter of the public finance is classified under five broad categories of
which the first two are discussed. They are,

1.3.1 Public Revenue

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 1.3.2 Public Expenditure

1.3.3 Public Debt

1.3.4 Financial Administration

1.3.5 Economic Stabilization

1.3.1. Public Revenue

Under this category, the sources of the public revenue, principles of taxation,
effects of taxes on the economy, methods of raising revenue and the like are dealt
with. Public revenue is the means for public expenditure. Various sources of public
revenue are:

A. Tax Revenue, and

B. Non-tax Revenue
A. Tax Revenue
Taxes are compulsory payments to government without expectation of direct return
or benefit to tax payers. It imposes a personal obligation on the taxpayer. Taxes
received from the taxpayers, may not be incurred for their benefit alone. Tax
revenue is one of the most important sources of revenue.

Taxation is the powerful instrument in the hands of the government for transferring
purchasing power from individuals to government. The objectives of taxation are
to reduce inequalities of income and wealth; to provide incentives for capital
formation in the private sector, and to restrain consumption so as to keep in check
domestic inflationary pressures.

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From the above discussion we can conclude that the elements of taxation are as
follows:

a. it is a compulsory contribution
b. government only imposes taxes
c. in payment of tax an element of sacrifice is involved
d. taxation is aimed at welfare of the community
e. the benefit may not be proportional to tax paid
f. tax is a legal collection.
The various types of taxes can be listed under three heads. First type can be titled
taxes on income and expenditure which include income tax, corporate tax etc. The
second is taxes on property and capital transactions and includes estate duty, tax on
wealth, gift tax etc. The third head, called taxes on commodities and services,
covers excise duties, customs duties, sales tax, service tax etc. These three types
can be reclassified into direct and indirect taxes. The first two types belong to the
category of direct taxes and the third type comes under indirect taxes.

B. Non-tax Revenue

This includes the revenue from government or public undertakings, revenue from
social services like education and hospitals, and revenue from loans or debt
service. To sum up, non-tax revenue consists of:

i) interest receipts
ii) dividends and profits
iii) fiscal services and others.
1.3.2 Public Expenditure

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Recently, there has been both quantitative and qualitative change in government’s
expenditure. This category deals with the principles of public expenditure and its
effect on the economy etc.

Government of a country has to use its expenditure and revenue programs to

produce desirable effects on national income, production, and employment. The
role of public expenditure in the determination and distribution of national income
was emphasized by Keynes.
The term “Public Expenditure” is used to designate the expenditure of government-
central, state and local bodies. It differs from private expenditure in that
governments need not pay for themselves or yield a pecuniary profit. Public
expenditure plays the dual role of administration and economic achievement of a
nation. Wise spending is essential for stability of government and proper earnings
are a prerequisite for wise spending. Hence planned expenditure and accurate
foresight of earnings are the important aspects of sound government finance.

Public expenditure is done under two broad heads viz., developmental expenditure
and non-developmental expenditure. The former includes social and community
services, economic services, and grants in aid. The latter mainly consists of interest
payments, administrative services, and defense expenses. Expenditure can also be
classified into revenue and capital expenditure.

A. Plan and Non-plan Expenditure

Expenditure is classified under the following heads:

I. Non-plan Expenditure

Non-plan expenditure of central government is divided into revenue and capital

expenditure. Under non-plan revenue expenditure we include interest payment,

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defense expenditure, major subsidies, interest and other subsidies, debt relief to
farmers, postal deficit, police, pensions, other general services, social services,
grants to states and union territories. Non-plan capital expenses include defense
expenses, loan to PSUs, loans to states and union territories, foreign governments
etc.

II. Plan Expenditure

The second major expenditure of central government is plan expenditure. This is to

finance the following:

i) Central plans such as agriculture, rural development, irrigation and flood

control, energy, industry, and minerals, communication service and
technology, environment, social service and others.

ii) Central assistance for plans of the states and union territories.

Expenditure can also be categorized into revenue and capital expenditure.

Revenue expenditure relates to those, which do not create any addition to assets,
and covers activities of government departments’ services, subsidiaries and interest
charges. Capital expenditure involves that expenditure, which results in creation of
assets. Finance ministry is responsible for plan expenditure. This includes grants
to the state.

Hence the expenditures are classified as capital and revenue. Alternatively, these
expenses can be re-classified into plan and non-plan expenditure.

B. Social Expenditure
Government takes the responsibility of protecting the interests of the community as
a whole and promotes the implementation of welfare programs. Government
spends huge amounts for providing benefits such as old age pensions, accident

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benefits free education and medical services. This expenditure on human
resources comes under social expenditure.

Governments are moving towards the objective of achieving maximum social

welfare. Expenditure on education, public health, welfare schemes for workers,
relief and rehabilitation of displaced persons and such other services may not yield
direct benefit in the short run. But in the long run they contribute to improvement
in the quality at human resources.

The main classifications of Government expenditure can be seen in the following

diagram.

Public expenditure

Revenue capital

Expenditure expenditure

Plan Non-plan

Central plan Interest payments

Central assistance Subsidies

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 to states & PSUs Defense

Others

Plan Non- plan

Developmental Defense, capital

Projects Loans to PSUs

Loans to Regional/state

Governments & Others.

1.4 Role of Fiscal Policy- Its Significance to Business Economy in

Developing Countries

The main goal of the fiscal policy in developing countries is the promotion of the
highest possible rate of capital formation. Underdeveloped economies are in the
constant deficit of the capital in the economy and thus, in order to have balanced
growth accelerated rate of capital formation is required. For this purpose the fiscal
policy has to be designed in a way to raise the level of aggregate savings and to
reduce the actual and potential consumption of people.

• To divert existing resources from unproductive to productive and socially more

desirable uses. Hence, fiscal policy must be blended with planning for
development.
• To create an equitable distribution of income and wealth in the society.
• To protect the economy from the ills of inflation and unhealthy competition from
foreign countries
. • To maintain relative price stability through fiscal measures.

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• The approach to fiscal policy must be aggregate as well as segmental. The
sectoral imbalances can be curbed by appropriate segmental fiscal measures.
• The government expenditure on developmental planning projects must be
increased. For this deficit financing can be used. It refers to creation of
additional money supply either by creation of new money by printing by
government or by borrowing from the central bank.
• Public borrowing, loans from foreign nations etc can be used in the development
of the resources for public sector.
• Fiscal policy in the developing economy has to operate within the framework of
social, cultural and political conditions which inhibit formation and
implementation of good economic policies.
• In order to reduce inequalities of wealth and distribution, taxation must be
progressive and government spending must be welfare-oriented.
• The hindrances in the effective implementation of fiscal policy in the developing
countries are loopholes in taxation laws, corrupt tax administration, a high
population growth, extravagant governmental spending on non-developmental
items, an orthodox society etc.

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Lo2. Determine account payable

Tax on Interest Income on Deposits

Every person deriving income from interest on deposits shall pay tax at the rate of
5%.
. Dividend Income Tax
 Is an income tax on dividend payments to the stock holders of accompany
 Every person deriving income from dividends from a share company.
 Are subject to tax at the rate of 10%. The withholding agent shall withhold
or collect the tax and account to the Tax Authority.
Income tax from Royalties
 ‘Royalty income’ means a payment of any kind received as a consideration for
the use of, or the right to use, any copyright of literary, artistic or scientific
work including cinematography films, and films or tapes for radio or television
broadcasting.
 Royalty’s income shall be liable to tax at a flat rate of 5%.
Income tax from Games of Chance
 Every person deriving income from winning of games of chance.
e.g., lotteries, tombola’s, and other similar activities
 Are subject to tax at the rate of 15%, except for winning of less than 100 Birr.
 The payer shall withhold or collect the tax and account to the Tax Authority.
Indirect Taxes
Indirect tax is a tax levied indirectly, as one levied on commodities before
they reach the consumer but ultimately paid by the consumer as part of the
market price.
The most important kind of indirect tax is;
a. Value added tax c. excise tax e. stamp duty
b. Turn over tax d. tariff
a. Value Added Tax (VAT)
VAT is a tax on consumer expenditure. It is collected on business transactions and
imports. A taxable person can be an individual, firm, company, as long as such a
person is required to be registered for VAT.
Most business transactions involve supplies of goods or services.
VAT is payable if they
 Made by a taxable person;

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 Made in the course or furtherance of a business;
 etcs
The Value Added Tax would be levied at the rate of 15% of the value and taxable
transaction is exceed the total value of Br 500,000.00.

b. Turnover Tax
 The Turnover Tax would be payable on goods sold and services rendered by
persons not registered for Value Added Tax. The rate of Turnover Tax is 2% on
goods sold locally and 10% on services.
 The base of computation of the Turnover Tax is the gross receipts in respect of
goods supplied or services rendered.
 A person who sells goods and services has the obligation to collect the
Turnover Tax from the buyer and transfer it to the Tax Authority.
 In accordance with the Turnover Tax Proclamation No. 308/2002, the following
would be exempted:
 Supply of national or foreign currency and of securities;
 Rendering by religious organizations of religious or other related
services;
 Supply of prescription drugs specified in directives issued by the
relevant government agency, and the rendering of medical services;
 Rendering of educational services provided by educational institutions;
 Supply of goods and rendering of services in the form of humanitarian
aid;
 Supply of electricity, kerosene and water;
 Provision of transport;
 Permits and license fees;
 Supply of goods or services by a workshop employing disabled
individuals (if more than 60% of the employees are disabled);
 Supply of books.

c. Excise Tax(selective tax )
 It is believed that this tax should be imposed on luxury goods and basic goods,
which are demand inelastic.

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 It is also believed that imposing the tax on goods that are hazardous to a health
and which are causes to social problems will reduce the consumption thereof.
e.g. cigarettes
Rate of Excise tax:
The excise tax would be imposed on goods imported or either produced locally in
accordance with Excise Tax Proclamation No. 307/2002.
Goods to be liable to Excise Tax (produced locally or imported) includes,
Whisky and All types of -50%wine, Cigarettes- 75%, Television and video
cameras-40%, Dolls and toys-20% and etc

The base of computation of Excise Tax is the cost of production for goods
produced locally.
d. Tariff (custom duties)
 Are taxed levied on iported or exported goods.
 Imported duties also protect domestic industries from foreigner
competition by making more expensive than their domestic counter parts.
Categories of Taxpayers
Taxpayers are classified into the following three major categories:
1) Category “A “Taxpayers annual income of above Br 500,000.00
2) Category “B” Taxpayers annual income of Br 100,000.00-500,000.00
3) Category “C Tax payer’s annual income of up to Br 100

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