ADVANCED TAXATION

SISAY MULATE (PhD)

DEPARTMENT OF ACCOUNTING AND
FINANCE
COLLEGE OF BUSINESS AND ECONOMICS
DEBRE BERHAN UNIVERSITY
SISAY MULATE (PHD) 1
CHAPTER ONE

OVERVIEW OF
TAXATION
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 What is taxation?
• Taxation is a system of raising revenue by a
government through tax.
• It is a method of collecting funds by a
government from tax sources to finance its
operation.

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 What is tax?
• 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”
• Dr. Dalton also defines tax as “a compulsory contribution
imposed by a public authority, irrespective of the exact
amount of service rendered to the taxpayer in return”

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The salient elements embodied within the above definition
and their connotations are as follows:-

• Compulsory: a tax is not a voluntary contribution.

• Levy: a tax is an imposition.
• Economic unit: a tax is payable by an economic unit.
• Government: a tax is payable to government.
• Without a definite and direct quid pro quo: a tax is levied
not in return for any specific service rendered or a commodity
supplied by the government for the payer.

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Basic characteristics of modern tax
 A compulsory levy
 Levied by only the government
 Generally payable in money
 Not based on condition/not conditional
 A lawful collection/ legal activities
 Imposes personal obligation
 Levied for public purpose
 For the common benefit
 Involves an element of sacrifice
 Based on taxable object-
 A regular and periodic payment
 Does not discriminate
 Have specific objectives
 Recognize the basic rights of tax payers

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 Objectives of Taxation
1. Raising revenue by a government to finance its expenditure.
2. To minimize income and wealth inequalities.
3. To ensure economic stability/stabilize economy.
4. To discourage the consumption of harmful product.
5. To promote private investment/redirect private investment.
6. To reduce regional imbalances
7. To enhance capital formation/accumulation
8. To utilize scarce resources for the production of more essential
goods.
9. To encourage exports
10. To minimize unemployment/create more employment
opportunities.
11. To enhance standard of living.
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 Principles/Canons of Taxation.
1. Principle of equity/fairness/equality
– according to this canon, every person ought to contribute toward the support of
the government, as nearly as possible, in proportion to their abilities.
– Canon of Equality/ability-to-pay principle
2. Principle of neutrality: states that a taxation system of a country should be
neutral in the sense that the tax system/structure of the country must be
established in such a way as to avoid interference with the attainment of the
optimum allocation and use of resources and where possible to assist the
attainment of the optimum. Taxation can be held neutral if it fulfills the
following conditions:
A. No distortion on economy- it does not create any inflationary or deflationary
effect in the economy.
B. No unneutral effect on economy- taxation must not have unneutral effect on an
economy, i.e., the taxes must not alter the choice or course of action (decision)
on the part of members of the society.

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 Cont…
3. Principle of efficiency:- In addition to being fair and neutral, a good tax
system should also be efficient. The efficiency of a country’s tax system is
measured in terms of its efficiency in administrative and compliance costs.
4. Principle of certainty:- this principle requires that the tax which
each individual is required to pay should be certain and not arbitrary.
– The time of payment, the manner of payment, the quantity to be paid should be certain.

5. principle of Simplicity:- this principle states that a tax system

should be simple, easy and understandable to the tax payer.
• If the tax system is vague and complex, the tax payer can’t estimate his tax
liability and it will cause irregularities in the payment and leads to
corruption.
3. Principles of Convenience- it stated that the
– mode and
– timing of tax payments should be, as far as possible, convenient to the tax payer.

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 Cont…
7. Principle of Economy growth – the tax system of the country should neither
discourage nor hinder national economic goals.

8. Principle of transparency and visibility:- it implies that tax system should be

transparent and visible to the citizen.

9. Principle of minimum tax gab:- tax gap=tax actually imposed-tax voluntarily

paid

10. Principle of Productivity- the tax system should be productive enough i.e.

– it should ensure sufficient revenue to the government and

– it should encourage productive activity by encouraging the people to work, save and invest.

11. Principle of Elasticity- it implies that taxes should be increased or decreased

according to the needs of the government.

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 Cont…
12. Principle of Diversity – according to this principle, tax system
should diverse in nature.
– The burden of tax should be decentralized so that everyone should pay
according to his liability.

– To achieve this, the government should impose various types of taxes.

13. principle of Co-ordination- this principle states that, there should

be a proper co-ordination between various authorities (federal,
state and local tax collecting agencies) while imposing taxes so as
to avoid double and triple taxation.

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 Tax System Structures
• The ability to pay taxes can be accurately measured with net
income.
• The tax systems may be summarized as follows:
A. Proportional Tax System.
B. Progressive Tax System.
C. Regressive Tax System.
D. Digressive Tax system

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 A. Proportional Tax System:

• A proportional tax, also called a flat tax is a system that

taxes all entities in a class typically either citizens or
corporations at the same rate (as a proportion on income),
as opposed to a graduated or progressive scheme.

• The term “flat tax” is one where the tax amount is fixed as
a function of income and is a term mainly used in the
context of income taxes.

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 Merits of Proportional Tax System

• Easy and simple in nature

• No change in income distribution
• Neutralizing effect
• Not-disturbing

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 Demerits of Proportional Tax System

• Inequitable
• Not reduce inequalities
• Not elastic
• Bad effect on the economy

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 B. Progressive Tax System:

• A progressive tax or graduated tax is a tax that is larger as a

percentage of income for those with larger incomes.
• It is usually applied in reference to income taxes, where
people with more income pay a higher percentage of it in
taxes.
• The term progressive refers to the way the rate progresses
from low to high.
• Example: Ethiopian income tax rate

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Merits of progressive tax structure
• Reduce inequalities
• Economical and elastic
• Economic stability
• Better use of resources

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 Demerits of progressive tax structure
• Discourage capital formation
• Provokes (aggravates) tax evasion
• Arbitrary-progressive taxation is not bind by rules but is
arbitrary

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 C. Regressive Tax System:

• In regressive tax system, the amount of tax is

smaller as a percentage of income for people
with larger incomes.
• Many taxes other than the income tax tend to
be regressive in practice
• "The tax rate decreases as the tax base
increases".

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 D. Digressive Taxation System.

• It is similar to progressive tax structure, but in a digressive

tax system, the average rate of progression is in a
diminishing rate.
• It is a system in which the tax rate will increase gradually
and reach the peak and there after the incremental tax rate in
each additional layer of the tax bracket (marginal tax rate)
decreases as the segment of the tax base increases.
• This can be used as incentive to work, save and invest.

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 Tax Evasion and Avoidance.
 Tax avoidance means, “tax-payer may resort to a device within the ambit of law to
divert the income before it accrues or arises to him”.

 The tax avoidance can be defined as “escaping from the tax liability by using the
available loop-holes of the tax laws”.

 Divorcing the wife on paper so that her income is not added together with
husband’s income is also a common device for tax avoidance.

 Suppose a taxpayer’s total income exceeds the maximum tax-free amount, then
he has to pay the tax on such excess amount. But if he invests the excess amount in
any of the approved schemes for which there is a relief in the tax law, he can save on
tax altogether.

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 Tax Evasion:

• Tax evasion means fraudulent action on the part of the

taxpayer with a view to violate civil and criminal
provisions of the tax laws.

• It can be defined as “tax evasion implies the activities

involving an element of deceit, misrepresentation of facts,
and falsification of accounts including downright fraud”.

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

THANKYOU!!!

4/23/201
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