Cross country comparison of horizontal equity

Table of Contents

Topic Page noAbstract 5

Introduction Horizontal equity Objective of the study Methodology Limitations

6677

Horizontal equity in Bangladesh 8

Horizontal equity in India 9

Horizontal equity in Thailand 10

Horizontal equity in United Kingdom 11

Cross country comparison 12

Observation & Recommendation 13

Conclusion 14

Reference 15

2

Abstract

Money given by taxation has been used by countries throughout the history to do many state

functions. Some of these include the enforcement of law and public order, safeguard of property,

economic infrastructure (roads, legal tender, enforcement of contracts, etc.), subsidies, and the

function of government itself. A segment of taxes also go to pay off the state's debt and the

interest this debt accumulates. Governments also use taxes to finance welfare and public

services. These services can include education systems, health care systems and etc.

While collecting the taxes, countries follow different principles one of which is equity. Equity

principle says People should pay according to their ability and to the benefits they receive from

the state. And there are two concepts of equity. One is horizontal equity and another is vertical

equity. This paper will mostly focus on horizontal equity which states that individuals with

similar income and assets should pay the same amount in taxes. Also the paper will try to show

the aspects of horizontal equity in the tax system of Bangladesh and provide a cross country

comparison.

3

Introduction

What is Horizontal equity?

An economic theory, that says that persons with same earnings and property should pay the same

amount in taxes. Horizontal equity should apply to persons considered equal regardless of the tax

system in place. The more neutral a tax system is the more horizontally equitable it is considered

to be.

According to the concept of horizontal equity people in the same income group have different

economic situations and financial commitments due to their age, social class, marital or parental

status etc. Equity is maintained by giving deserving tax benefits to different groups. For

example: different threshold for different age groups.

Objective of the study

The objective behind this report is to grasp a deeper understanding of the importance of the

horizontal equity in Taxation. And to get the scenario of horizontal equity in Bangladesh and

some foreign country tax system.

The specific objectives are:

1. To deliver an overview of horizontal equity in Bangladesh as well as its importance.

2. To deliver an overview of horizontal equity in India, Thailand and United Kingdom.

3. A cross country comparison.

4

Methodology:

The research is based on secondary information. The data are taken from Internet mostly the

websites of respective tax department of different country. Information is also collected from the

journals available in the internet.

Limitations of the Study:

Very Limited time and the short nature of this paper prevent this report from being a

comprehensive quantitative study. Moreover the rationale of this report requires it to be a

detailed one and also the fact that it is conducted based on secondary data only.

5

Horizontal equity in Bangladesh:

The tax system of Bangladesh is based on “The Income Tax Ordinance, 1984” and “The Income

Tax Rules, 1984”. Among direct taxes, income tax is one of the main sources of revenue. It is a

progressive tax system. Income tax is imposed on the basis of ability to pay. The more a taxpayer

earns the more he should pay''- is the basic principle of charging income tax. It aims at ensuring

equity and social justice. National Board of Revenue (NBR) is main tax authority in

Bangladesh.

For the purpose of computing the income chargeable under the head "salary", the value if

perquisites, allowances and benefits includable in the said income shall be determined in

accordance with the provision of the rule 33A to rule 33J, whichever is applicable. The tax

allowances enjoyed by the tax payer of Bangladesh are:

1. House rent allowances receivable in cash

2. Rent free accommodation

3. Conveyance allowance receivable in cash with no conveyance facility

4. Conveyance provided for personal or private use

5. Additional conveyance allowance

6. Free or concessional passage for travel abroad or within Bangladesh

7. Entertainment allowance

8. Other benefits

6

India

The tax system of India is based on “Income-Tax Act, 1961”. Income Tax Department under

department of revenue, Ministry of Finance is main tax authority in India. The tax allowances

enjoyed by the tax payer of India are:

1. House Rent Allowance

2. Dearness Allowance

3. Leave Travel Allowance

4. Certain allowances given by the employer to the employee are exempt u/s 10(14). All

these exempt allowance are detailed in Rule 2BB of Income-tax Rules and are briefly

given below:

I. Allowance granted to meet cost of travel on tour or on transfer.

II. Allowance granted on tour or journey in connection with transfer to meet the

daily charges incurred by the employee.

III. Allowance granted to meet conveyance expenses incurred in performance of duty,

provided no free conveyance is provided.

IV. Allowance granted to meet expenses incurred on a helper engaged for

performance of official duty.

V. Academic, research or training allowance granted in educational or research

institutions.

VI. Allowance granted to meet expenditure on purchase/ maintenance of uniform for

performance of official duty.

7

Thailand

The tax system of Thailand is based on “Revenue code”. The Revenue Department is main tax authority in Thailand. Allowances (Exemptions) allowed for the calculation of Personal Income Tax (PIT):

1. Personal allowance

2. Spouse allowance

3. Child allowance

4. Education allowance

5. Parents allowance

6. Life insurance premium

7. Approved provident fund contributions 

8. Long term equity fund

9. Home mortgage interest

10. Social insurance contributions

11. Charitable contributions

8

United Kingdom

Her Majesty's Revenue and Customs (HMRC) is a non-ministerial department of the UK

Government responsible for the collection of taxes, the payment of some forms of state support,

and the administration of other regulatory regimes including the national minimum wage.

HMRC was formed by the merger of the Inland Revenue and Her Majesty's Customs and

Excise which took effect on 18 April 2005. The department's logo is the St Edward's

Crown enclosed within a circle.

There are a number of 'tax-free' and 'tax-deductible' allowances and reliefs citizens of UK are

entitled to get to reduce their tax bill - and in some cases mean they have no tax to pay.. The

allowances are given below:

1. Personal Allowance

2. Blind Person's Allowance

3. Married Couple's Allowance

4. Giving to charity 

9

Cross country comparison:

Bangladesh India Thailand United Kingdom

House rent allowances House Rent Allowance Personal allowance Personal Allowance

Rent free accommodation Dearness Allowance Spouse allowance Blind Person's

Allowance

Conveyance in cash Conveyance Allowance Child allowance Married Couple's

Allowance

Conveyance provided Travelling Allowance Education allowance Giving to charity

Travel allowances Helper Allowance Parents allowance

Entertainment allowance Conveyance Allowance Life insurance

premium

Other benefits Uniform Allowance. Approved provident

fund contributions

Academic Allowance Charitable

contributions

10

Observation and Recommendation

By analyzing the tax allowances of Bangladesh, India, Thailand and United Kingdom, it is pretty

clear that these exemptions or allowances are based on the present social condition of respective

countries. It is also seen that all the countries offer a similar type of allowances to the taxpayers.

This study would like to suggest some point which the National Board of Revenue (NBR) may

follow for the welfare of the tax payers of Bangladesh.

Bangladesh is developing rapidly. And education can fasten this development process to a

great extent. So NBR should provide education allowances to the taxpayers. It may cover

the Higher education cost of the tax payer or the cost of education for his children.

NBR can offer tax allowance to the handicapped people e.g. Blind tax in UK. This will

help to improve the life of those handicapped people tremendously.

NBR can conduct survey of the taxpayers for providing them with necessary allowances

not hampering the revenue collection of the country.

11

Conclusion

The principle of horizontal equity is a essential measure used to measure whether tax burdens are

reasonably distributed. On the one hand, the idea that tax policy should struggle for horizontal

equity is uncontroversial (Musgrave 1990). It protects taxpayers against random discrimination,

and also seems constant with basic principles of equal worth.

Some tax scholars uphold that the property of horizontal equity is not really an independent

principle of tax equality, but instead is subordinate to the concept of vertical equity, which holds

that people with different incomes should pay different amounts of tax (Kaplow 1989). As a

matter of logic, a tax system that assigned different tax burdens to people with different incomes

should allocate the same tax burden to people with the same income. Viewed in this way, equal

treatment of equals in taxation is not an end in itself, but rather a means to ensuring that tax

burdens are distributed in a way that is vertically equitable.

12

Reference

Books:

1. Rashid Kazi, Income Tax Manual, 3rd edition.

Web resources:

1. [Unattributed], citing source: [http://www.taxmatebd.com], May3, 2014

2. National Board of Revenue, citing source: [http://www.nbr-bd.org/incometax.html], May

4, 2014

3. Horizontal equity, citing source:

[http://www.investopedia.com/terms/h/horizontalequity.asp] May 1, 2014

4. [Unattributed], citing source: [http://www.moneycontrol.com/tax/salaries/whatallowanceswhich-allowancesexempt_622827.html], May 6, 2014

5. HMRC, citing source:

[http://www.hmrc.gov.uk/incometax/personal-allow.html], May 6, 2014.

6. Revenue code, Thailand law online, citing source:[http://www.thailandlawonline.com/revenue-code/tax-law-revenue-code-general-provisions], May 6, 2014.

13