Chapter 1Taxation
Taxation is the biggest source of public revenue of modern government. Tax is a kind of money of which it is a legal duty of every citizen of a country to pay honestly. It may be levied on income, property and even at the time of purchasing commodity. In short, tax is the major source of government income. It is a compulsory payment to the government by tax-payer without any expectation of some specified return.
The revenue of government comes basically from two sources i.e. non-tax sector and tax-sector. Non-tax revenue includes different sources like grants, gift, administrative income and business income like registration fee, fines and penalties. The basic objective of non-tax revenue is not called revenue, but to provide services to the people. In Nepal around 20% revenue comes from this source. Another source of government revenue is taxation. Custom duty, excise duty, vat, personal income taxes are some example of sources of tax revenue. In Nepal around 80% revenue comes from this source.
The government pass for getting tax revenue is to collect tax as per act. The tax cannot be imposed without the act of parliament in Nepal too.
What is tax?
The word ‘Tax’ is derived from the Latin word ‘taxare’ which means to estimate. In simple words, it is compulsory payment by the people. If a person denies the tax payment, he/she may be penalized or punished in the court of law. So ‘Taxation’ is the compulsory contribution from a person to the government to meet expenses incurred in the common interest. So tax is the compulsory levy and those who are taxed have to pay it without any direct benefit. Due to this compulsory nature some economist says, “Nothing is certain except death and tax.” some economist says, “Death and tax are both certain but death is not annual, tax is annual.” Some economist says, “Death means stopping to pay tax.”
Tax is necessary contribution by the tax payer to social objectives like securing high level of employment, social security, promoting economic stability of nation, etc.
Features
Tax is an important tool in the development of economy. It affects the overall structure of the whole economy. The main elements of good tax system are highlighted below:
1) Tax is the compulsory payment not a voluntary payment or donation.
2) Tax is the payment to the government as per the prevailing law.
3) Aim of tax collection is for public welfare.
4) Taxes are paid by the person.
5) Taxes are paid out of income.
6) No effect on trade and industry. (honeybee concept)
7) Tax is required to be paid at regular intervals.
8) Failing to pay taxes is subject to punishment by law.
Objective
The primary objective of a tax system is to generate revenues to pay for the expenditures of government at all levels. Besides raising revenues, tax has become an instrument of social and economic policy for the government. The main objectives of taxation are:
1. Raising public revenue
Normally, the objective for the imposition of tax is to collect the revenue for the government. The government providing social service promoting economic development and meeting war expenditure all of this expansion in the scope of economic activities have created up greater fund to be spent by the government. The greater the need of funds the greater is resource of taxation. Thus, the aim of taxation is to raise public revenue to meet the increasing public expenditure.
2. Reduction of inequalities in income and wealth
Another aim of taxation is to reduce the inequality income. One of the great problems of underdeveloped country is that there is the vast gap between the income of person in the highest income group and of those in the lowest income group. One of the objectives of taxation is to redistribute income and wealth in such a way as to ensure more just and equitable distribution. This is possible by taxing; rich people are imposed high tax and less tax to the poorer. This is the objective of progressive tax like income tax, wealth tax, etc.
3. Restriction on unnecessary consumption
Another objective of taxation is to restrict the unnecessary consumption particularly harmful commodities such as wine, cigarette, tobacco, etc. when heavy tax is imposed on such commodities, the consumption of such commodities are automatically reduced.
4. Increase in national income
Another objective of taxation is to Increase in national income. Tax is the main source of government income and used for productive purpose and thereby overall production is increased. These increase in production leads to increase in national income of country along with increase in per capita income.
5. Business stability and maintaining full employment
Another objective of taxation is to bring above business stability and maintain full employment condition. Low rate of taxation during business depression provides more income to the people and help in raising demand as well as to revive business activities.
On the other hand, high rate of tax and additional tax may be useful to check inflation pressure on price. Thus, tax policy may be used as a regularity mechanism to achieve price stability, check business booms and depression and also maintain full employment in the economy.
Besides above mentioned points there are following;
6. To boost up the economy
Canon of taxation
There are different views regarding of a good tax system. The canons of taxation were first developed by Prof. Adam smith. Adam smith’s view in this respect is generally accepted as the features of good tax system. Smith’s four canons as outlined in his book entitled ‘An enquiry into the nature and causes of wealth of nation’ are as follows.
1) Canon of equality or benefit
According to this Canon, a good tax system is that which is based on the principle of equality. In broader sense, equality may be considered to be same as justice. In this principle, it is maintained that the tax must be levied according to the paying capacity of the individual. In other words, the principle of benefit states that the burden of taxation should be fair and just. Thus, rich people must be subjected to higher taxation in comparison to the poor. Higher the income higher the tax, lower the income lower the tax.
Adam smith has defined this principle as “the subject of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities, that is, in proportion to the revenue which they respectively enjoy under the protection of state.”
He states that every individual should contribute according to his ability so that equalities of sacrifice are achieved.
2) Canon of certainty
Canon of certainty is important Canon of taxation; Certainty in the word of smith is related to the time, method, manner and quantity of paying tax. It means the tax payer should determine the following manners carefully.
a. The time of the payment
b. Amount to be paid
c. Method of payment
d. Place of payment
e. The authority to whom the tax is to be paid
3) Canon of convenient
Convenient is another quality that should be in good tax system. Most of the tax payers are ordinary people who neither have sufficient tax-related knowledge nor the capacity to hire tax experts. The tax system should be of such type that can be followed by ordinary people in the society.
The time of payment should be convenient like land revenue should best be collected at the harvest time. The income tax from the salary should best be collected when they get their salary from their employer.
4) Canon of economy
This Canon of economy implies that minimum possible money should be spent in the collection of tax. The maximum part of collected amount should be deposited in the government treasury. Thus, all extra unnecessary expenditure in this collection should be avoided.
In addition to above four Canons of taxation given by Adam smith, there are other Canons which have been added by modern economist Bastable are given below:
5) Canon of productivity
This canon says that the fund raised through taxes should be utilized by the government in productive sector of the economy so that the taxpayer can see the utilization of their hand-earned money paid as taxes.
According to this principle, it is better to impose a few productive taxes than to go in for a large number of unproductive taxes.
6) Canon of elasticity/flexibility
This canon signifies that the taxes should be levied in such a way the amount to be collected can be increased or decreased with the least inconvenience from the time to time.
Other modern economists have added some other canons of taxation. They are:
7) Canon of simplicity
8) Canon of uniformity
9) Canon of Neutrality
10) Canon of co-ordination
11) Canon of diversity
Types/Classification of tax
A tax can be classified into different division on different basis. Our government classifies tax in following heads i.e. taxes from international trade, taxes from internally produced and consumed goods, land revenue and taxes from income, profit and property.
Basically, the taxes can be classified in following different ways:
On the basis of form/shifting of burden
Direct tax
A direct tax is one which cannot be shifted to others. A direct tax is actually paid by the person on whom it is legally imposed like income tax, vehicle tax, and property tax. It is directly collected by the government from the person who bears the tax burden. It is the tax on income and property.
Merits:
a) It satisfies the principle of ability to pay.
b) It is economical because it is imposed on limited person in the society.
c) It is elastic.
d) It has quality of progressive.
Demerits:
a) It creates feeling of high burden of tax.
b) It is inconvenient.
c) There is high evasion.
d) It burden goes to only small section of the people.
e) It is expensive for the government to collect tax individually.
f) Its scope is very narrow.
Indirect tax
An indirect tax is that tax where the person pays tax to the businessman, not to the government. In other words, an indirect tax is imposed on one person but paid partly or fully by another like excise duty, VAT, etc. indirect tax can be shifted.
Merits:
1. It is convenient
2. It is difficult to evade
3. It has wide base
4. Mass participation
5. It is universal in nature, it is collected from all the citizen
Demerits:
1. It is not based on ability to pay
2. It creates inequality in the society, rich and poor are same.
3. This tax is uncertain with the fluctuation in demand the tax amount can also fluctuate.
Major taxes in Nepal
Nepal government collects revenue from different sources. Right now, the types of these taxes are around 24. However, from the revenue point of view only five types of tax have importance.
1. Custom duty
Taxes imposed by a country on all import and export goods, when the goods cross the boundaries of the country are called custom duty. It is also called boarder tax. The customs imposed on imported goods are called import duty whereas, imposed on imported goods are called export duty. In Nepal, from custom duty cover in previous year around 19% of the total revenue.
2. Value added tax (VAT)
VAT system was introduced in 1919 in France and used in 1954. Right now more than 160 countries in the world and latest country, south Sudan of the world use this tax system. In Nepal, this tax was introduced in 1997 replacing sales tax, entertainment tax, hotel tax and contract tax. Right now, the rate of VAT on Nepal is 0 and 13%. The contribution from this tax is around 29% of the total revenue.
3. Excise duty
Tax levied on the manufacture, sell or consumption of goods or services injurious to health or luxurious goods is called excise duty. It is narrow-based indirect tax for this tax provides around 12% of the total revenue in previous year.
4. Local tax
Local tax is the tax imposed by local governments however in Nepal the concept of local tax is a new one. It was started after 2054.
5. Income tax
Taxation is the biggest source of public revenue of modern government. Tax is a kind of money of which it is a legal duty of every citizen of a country to pay honestly. It may be levied on income, property and even at the time of purchasing commodity. In short, tax is the major source of government income. It is a compulsory payment to the government by tax-payer without any expectation of some specified return.
The revenue of government comes basically from two sources i.e. non-tax sector and tax-sector. Non-tax revenue includes different sources like grants, gift, administrative income and business income like registration fee, fines and penalties. The basic objective of non-tax revenue is not called revenue, but to provide services to the people. In Nepal around 20% revenue comes from this source. Another source of government revenue is taxation. Custom duty, excise duty, vat, personal income taxes are some example of sources of tax revenue. In Nepal around 80% revenue comes from this source.
The government pass for getting tax revenue is to collect tax as per act. The tax cannot be imposed without the act of parliament in Nepal too.
What is tax?
The word ‘Tax’ is derived from the Latin word ‘taxare’ which means to estimate. In simple words, it is compulsory payment by the people. If a person denies the tax payment, he/she may be penalized or punished in the court of law. So ‘Taxation’ is the compulsory contribution from a person to the government to meet expenses incurred in the common interest. So tax is the compulsory levy and those who are taxed have to pay it without any direct benefit. Due to this compulsory nature some economist says, “Nothing is certain except death and tax.” some economist says, “Death and tax are both certain but death is not annual, tax is annual.” Some economist says, “Death means stopping to pay tax.”
Tax is necessary contribution by the tax payer to social objectives like securing high level of employment, social security, promoting economic stability of nation, etc.
Features
Tax is an important tool in the development of economy. It affects the overall structure of the whole economy. The main elements of good tax system are highlighted below:
1) Tax is the compulsory payment not a voluntary payment or donation.
2) Tax is the payment to the government as per the prevailing law.
3) Aim of tax collection is for public welfare.
4) Taxes are paid by the person.
5) Taxes are paid out of income.
6) No effect on trade and industry. (honeybee concept)
7) Tax is required to be paid at regular intervals.
8) Failing to pay taxes is subject to punishment by law.
Objective
The primary objective of a tax system is to generate revenues to pay for the expenditures of government at all levels. Besides raising revenues, tax has become an instrument of social and economic policy for the government. The main objectives of taxation are:
1. Raising public revenue
Normally, the objective for the imposition of tax is to collect the revenue for the government. The government providing social service promoting economic development and meeting war expenditure all of this expansion in the scope of economic activities have created up greater fund to be spent by the government. The greater the need of funds the greater is resource of taxation. Thus, the aim of taxation is to raise public revenue to meet the increasing public expenditure.
2. Reduction of inequalities in income and wealth
Another aim of taxation is to reduce the inequality income. One of the great problems of underdeveloped country is that there is the vast gap between the income of person in the highest income group and of those in the lowest income group. One of the objectives of taxation is to redistribute income and wealth in such a way as to ensure more just and equitable distribution. This is possible by taxing; rich people are imposed high tax and less tax to the poorer. This is the objective of progressive tax like income tax, wealth tax, etc.
3. Restriction on unnecessary consumption
Another objective of taxation is to restrict the unnecessary consumption particularly harmful commodities such as wine, cigarette, tobacco, etc. when heavy tax is imposed on such commodities, the consumption of such commodities are automatically reduced.
4. Increase in national income
Another objective of taxation is to Increase in national income. Tax is the main source of government income and used for productive purpose and thereby overall production is increased. These increase in production leads to increase in national income of country along with increase in per capita income.
5. Business stability and maintaining full employment
Another objective of taxation is to bring above business stability and maintain full employment condition. Low rate of taxation during business depression provides more income to the people and help in raising demand as well as to revive business activities.
On the other hand, high rate of tax and additional tax may be useful to check inflation pressure on price. Thus, tax policy may be used as a regularity mechanism to achieve price stability, check business booms and depression and also maintain full employment in the economy.
Besides above mentioned points there are following;
6. To boost up the economy
Canon of taxation
There are different views regarding of a good tax system. The canons of taxation were first developed by Prof. Adam smith. Adam smith’s view in this respect is generally accepted as the features of good tax system. Smith’s four canons as outlined in his book entitled ‘An enquiry into the nature and causes of wealth of nation’ are as follows.
1) Canon of equality or benefit
According to this Canon, a good tax system is that which is based on the principle of equality. In broader sense, equality may be considered to be same as justice. In this principle, it is maintained that the tax must be levied according to the paying capacity of the individual. In other words, the principle of benefit states that the burden of taxation should be fair and just. Thus, rich people must be subjected to higher taxation in comparison to the poor. Higher the income higher the tax, lower the income lower the tax.
Adam smith has defined this principle as “the subject of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities, that is, in proportion to the revenue which they respectively enjoy under the protection of state.”
He states that every individual should contribute according to his ability so that equalities of sacrifice are achieved.
2) Canon of certainty
Canon of certainty is important Canon of taxation; Certainty in the word of smith is related to the time, method, manner and quantity of paying tax. It means the tax payer should determine the following manners carefully.
a. The time of the payment
b. Amount to be paid
c. Method of payment
d. Place of payment
e. The authority to whom the tax is to be paid
3) Canon of convenient
Convenient is another quality that should be in good tax system. Most of the tax payers are ordinary people who neither have sufficient tax-related knowledge nor the capacity to hire tax experts. The tax system should be of such type that can be followed by ordinary people in the society.
The time of payment should be convenient like land revenue should best be collected at the harvest time. The income tax from the salary should best be collected when they get their salary from their employer.
4) Canon of economy
This Canon of economy implies that minimum possible money should be spent in the collection of tax. The maximum part of collected amount should be deposited in the government treasury. Thus, all extra unnecessary expenditure in this collection should be avoided.
In addition to above four Canons of taxation given by Adam smith, there are other Canons which have been added by modern economist Bastable are given below:
5) Canon of productivity
This canon says that the fund raised through taxes should be utilized by the government in productive sector of the economy so that the taxpayer can see the utilization of their hand-earned money paid as taxes.
According to this principle, it is better to impose a few productive taxes than to go in for a large number of unproductive taxes.
6) Canon of elasticity/flexibility
This canon signifies that the taxes should be levied in such a way the amount to be collected can be increased or decreased with the least inconvenience from the time to time.
Other modern economists have added some other canons of taxation. They are:
7) Canon of simplicity
8) Canon of uniformity
9) Canon of Neutrality
10) Canon of co-ordination
11) Canon of diversity
Types/Classification of tax
A tax can be classified into different division on different basis. Our government classifies tax in following heads i.e. taxes from international trade, taxes from internally produced and consumed goods, land revenue and taxes from income, profit and property.
Basically, the taxes can be classified in following different ways:
On the basis of form/shifting of burden
Direct tax
A direct tax is one which cannot be shifted to others. A direct tax is actually paid by the person on whom it is legally imposed like income tax, vehicle tax, and property tax. It is directly collected by the government from the person who bears the tax burden. It is the tax on income and property.
Merits:
a) It satisfies the principle of ability to pay.
b) It is economical because it is imposed on limited person in the society.
c) It is elastic.
d) It has quality of progressive.
Demerits:
a) It creates feeling of high burden of tax.
b) It is inconvenient.
c) There is high evasion.
d) It burden goes to only small section of the people.
e) It is expensive for the government to collect tax individually.
f) Its scope is very narrow.
Indirect tax
An indirect tax is that tax where the person pays tax to the businessman, not to the government. In other words, an indirect tax is imposed on one person but paid partly or fully by another like excise duty, VAT, etc. indirect tax can be shifted.
Merits:
1. It is convenient
2. It is difficult to evade
3. It has wide base
4. Mass participation
5. It is universal in nature, it is collected from all the citizen
Demerits:
1. It is not based on ability to pay
2. It creates inequality in the society, rich and poor are same.
3. This tax is uncertain with the fluctuation in demand the tax amount can also fluctuate.
Major taxes in Nepal
Nepal government collects revenue from different sources. Right now, the types of these taxes are around 24. However, from the revenue point of view only five types of tax have importance.
1. Custom duty
Taxes imposed by a country on all import and export goods, when the goods cross the boundaries of the country are called custom duty. It is also called boarder tax. The customs imposed on imported goods are called import duty whereas, imposed on imported goods are called export duty. In Nepal, from custom duty cover in previous year around 19% of the total revenue.
2. Value added tax (VAT)
VAT system was introduced in 1919 in France and used in 1954. Right now more than 160 countries in the world and latest country, south Sudan of the world use this tax system. In Nepal, this tax was introduced in 1997 replacing sales tax, entertainment tax, hotel tax and contract tax. Right now, the rate of VAT on Nepal is 0 and 13%. The contribution from this tax is around 29% of the total revenue.
3. Excise duty
Tax levied on the manufacture, sell or consumption of goods or services injurious to health or luxurious goods is called excise duty. It is narrow-based indirect tax for this tax provides around 12% of the total revenue in previous year.
4. Local tax
Local tax is the tax imposed by local governments however in Nepal the concept of local tax is a new one. It was started after 2054.
5. Income tax
