Sessions 04_Classification and Choice of Taxes1

8/2/2019 Sessions 04_Classification and Choice of Taxes1

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Course No. 4135:

K e y W o r d s / O u t l i n e

Taxation

Classification and Choice of Taxes

Tax Structure in Bangladesh



Slide 1-2

Issues to be discussed:

Classification Taxes

Choice of Taxes between

- Proportional and Progressive taxes- Direct and Indirect taxes

Tax Structure in Bangladesh



Slide 1-3

Classification of Taxes

Basis Classification

Number of

taxes

Single tax: when a country has only one tax.

Multiple tax: when a country has more than one tax.

Impact and

incidence of taxes

Direct tax: when both the impact and incidence of tax fall on

same person or entity (e.g., income tax, gift tax, etc.)Indirect tax: when the impact and incidence of tax fall on

different persons or entities (e.g., VAT, customs duty, etc.)

Structure of

tax-rates

Proportional tax: when the tax increases (decreases) at a

constant rate with the increase (decrease) in tax-base

Progressive tax: with increase (decreases) in tax-base, if thetax increases (decreases) at a higher (lower) rate than the rate of

increase (decrease) in the tax-base

Regressive tax: with increase (decreases) in tax-base, if the tax

increases (decreases) at a lower (higher) rate than the rate of

increase (decrease) in the tax-base



Slide 1-4


Tax-Base (Tk.) Total Tax (Tk.) Marginal Tax Rate

10,000 1,000 10%

20,000 2,000 10%

30,000 3,000 10%

40,000 4,000 10%


10,000 1,000 10%

20,000 2,500 15%

30,000 4,500 20%

40,000 7,000 25%


10,000 1,000 10%

20,000 1,900 9%

30,000 2,700 8%

40,000 3,300 6%

Propor-tionalTax

Progre-ssiveTax

Regre-ssiveTax



Slide 1-5



Subject-

matter of

taxes

Personal tax: when tax is imposed on person or entity

In rem tax: when tax is imposed on goods, services, or property

(i.e., other than on person or entity)

Elasticityof taxes

Elastic tax: when a tax produces more revenue with increase intax rate and/or tax-base

Inelastic tax: when a tax produces equivalent or lower revenue

with increase in tax rate and/or tax-base

Classifi-

cation of tax-bases

Tax on income: when tax is imposed on income of the taxpayer

Tax on wealth: when tax is imposed on wealth of a taxpayer being theowner of the wealth

Tax on transaction: when tax is imposed on the value of a transaction or

on the quantity of goods or services under a transaction – may be ad

valorem tax if imposed on the value of a transaction, or specific tax (or

unit tax) if imposed on the quantity of goods or services transacted

Tax on people: when a tax is imposed per capita –

head/poll tax



Slide 1-6



Increase or

decrease in

public

revenue

Positive tax: when a tax contributes positively

towards the national exchequer – real tax

Negative tax: when a tax contributes negatively

towards the national exchequer – transfer payments

Collector of

taxes

Central tax: when a tax is collected by a central

government

Local tax: when a tax is collected by a local

government



Slide 1-7

Choice of Taxes:Proportional vs. Progressive Taxes

Proportional Tax Progressive Tax

1. Complexity in deciding upon a precise and

appropriate degree of progression, and

proportional tax is considered as better

alternative2. Does not effect the relative position of the

taxpayers

3. Simplicity and uniformity

4. Willingness to work more and save more

of the taxpayers not adversely affected as

in case of progressive tax5. Neutral tax in terms of allocation of

resources of the economy to different uses

6. Principle of equality justified on the

ground that money burden of tax increases

in the same proportion as the tax-base

increases

1. Consistent with the ability-to-pay

principles

2. Contribution to economic growth and

stability3. Powerful instrument for reducing

economic inequality

4. Minimizing aggregate sacrifice

5. Economical from the viewpoint of

collection, as the collection cost does

not rise with the increase in tax rates6. Elastic tax system and public revenue

can be raised at any time by

increasing the tax rates and vice

versa.

7. Best alternative to proportional tax

Arguments in favour



Slide 1-8

Choice of Taxes:Proportional vs. Progressive Taxes

Arguments against

Proportional Tax Progressive Tax

1. Numerous tax collection points and

administrative unmanageability and not

“economical”

2. Not consistent with the just and equitable

distribution of tax burden, as it falls moreheavily on the poor than on the rich

3. Widens the inequality of the distribution of

income and wealth

4. Possibility of being less revenue-yielding,

since the tax rate for the rich and the poor is

same and the State cannot obtain from thericher sections of the community as much they

can give

5. May cause to social instability, because it is

regressive in terms of real burden and

oppressive to the poor

6. Cannot be an elastic tax system, if the tax ratefor the small income-earner is already heavy

1. Fear of communism by the anti-

Communists (as per Communist

Manifesto, graduated income tax

proposed to achieve a transfer of capital

from the bourgeoisie to the proletariat)2. Disincentive to work more and also to

save and invest and thus possibility of

adverse effect on production and capital

formation

3. Political irresponsibility (possible

increase in government spending formore tax; & impossibility of taxing the

richer minority )

4. Excessive complexity (subdivision of

tax-base; unintended high tax for an

inordinate slab)

5. Possibility of very great efforts to evadea steeply graduate tax



Slide 1-9

Choice of Taxes:Direct vs. Indirect Taxes

Distinctions

Point Direct Tax Indirect Tax

1. Impact

and

incidence

In this case, both impact and

incidence lie on same person

or enterprise.

In this case, persons/enterprises on whom/which

impact falls, they try to shift the incidence on

others and hence, usually impact and incidence

lie on separate persons or enterprises.

2. Subject-matter

Direct taxes are usuallypersonal taxes.

Indirect taxes are usually in rem taxes.

3. Elasticity

of tax

If direct tax is progressive,

then it is also elastic.

Indirect taxes are usually inelastic.

4. Tax-base Usually, the tax-bases of direct

tax are income, wealth or

people (in case of poll tax).

Usually, the tax-bases of indirect tax are

transactions and production.

5. Tax

collection

cost

Collection cost of direct tax is

usually high due to evading

tendency of taxpayers.

Incidence usually falls on consumers and hence

the producers/sellers collect the tax from buyers/

consumers for Govt. & collection cost is low.

6. Equity In reality, direct taxes are

progressive and hence, largelyequitable.

Indirect taxes are usually regressive and hence,

inequitable.



Slide 1-10


Arguments in favour

Direct Tax Indirect Tax

1. Usually progressive.

2. Redistribution of income and wealth in

favour of lower earning group.

3. Revenue increases with the increase of income (productive).

4. Anti-inflationary.

5. Easy to determine impact and incidence of

tax.

6. Educative value to taxpayers by generatinga feeling of economic consciousness in the

mind of people.

7. Certainty ensured since the taxpayers are

alarmed in advance about the amount of

direct tax, timing and mode of its payment.

1. Advantageous to pay and

comprehensive tax payment.

2. Voluntary.

3. Does not make any harm towork-effort and initiative.

4. Flexible.

5. Can be used for special

purpose.

6. Tax-evasion is list possible.



Slide 1-11


Arguments against

Direct Tax Indirect Tax

1. Disincentive effect against

motivation

2. Stops or discourages work-effort andinitiative

3. Encourages tax-evasion and tax-

avoidance

4. Discourages domestic and foreign

investment5. High collection cost

6. Reduces savings

7. Narrowness of scope

8. Unpopular

1. Regressive

2. Penalizes certain

consumption3. Does harm to concerned

industry

4. Increases price

5. Difficult to determine the

impact of incidence of tax



Slide 1-12Tax & Nontax Revenues inBangladesh

Tax Revenue Non-Tax Revenue

NBR Portion 1. Taxes on Income and Profit

2. Value Added Tax (VAT)

3. Import Duty4. Excise Duty

5. Supplementary Duty (SD)

6. Other Taxes and Duties

1. Dividend and Profit

2. Interest

3. Administrative Fees and Charges

4. Fines, Penalties and Forfeiture5. Receipts for Services Rendered

6. Rents, Leases and Recoveries

7. Tolls and Levies

8. Non-Commercial Sales

9. Defence Receipts

10. Other Non-Tax Revenue and Receipts

11. Railway

12. Post Offices

13. Telegraph and Telephone Board

14. Capital Revenue

Non-NBR Portion 1. Narcotics and Liquor Duty

2. Taxes on Vehicles

3. Land Revenue

4. Stamp Duty (Non Judicial)



Slide 1-13Tax Structure of Bangladesh

*Other NBR Taxes and Duties + Land Revenue + Stamp Duty

Types of Taxes

Budget 2010-11 Revised 2009-10 % Increase over

Tk. (mn) % Tk. (mn) % FY10R

Direct Tax 239,830 31.54 192,501 30.10 24.59

Taxes on Income and Profit 210,050 27.62 165,600 25.89 26.84

Other Direct Taxes* 29,780 3.92 26,901 4.21 10.70Indirect Tax 520,594 68.46 447,060 69.90 16.45

Border Taxes 258,350 33.97 232,801 36.40 10.97

Domestic Taxes 262,244 34.49 214,259 33.50 22.40

Total Taxes 760,424 100.00 639,561 100.00 18.90

Tax-GDP Ratio 9.75 9.26

Revenue-GDP Ratio 11.90 11.51

Budget 2010-11 & Revised Budget 2009-10

Direct Tax 28.60% Indirect Tax 71.40%

Tax-GDP Ratio 9.03% Revenue-GDP Ratio 11.25%

2008-09

(Revised Budget):



Slide 1-14

Tax Structure of BangladeshBudget 2010-11 & Revised Budget 2009-10

Tax Revenue Budget 2010-111 Revised 2009-10 % Increase over

FY10R NBR Portion Tk. (mn) % Tk. (mn) %

Taxes on Income and Profit 210,050 27.62 165,600 25.89 26.84

Value Added Tax (VAT): 270,864 35.62 227,890 35.63 18.86

VAT on Imports 114,684 15.08 102,000 15.95 12.44

VAT on Domestic Goods and Services 156,180 20.54 125,890 19.68 24.06

Turnover Tax (TT) 60 0.01 60 0.01 ---

Import Duty 108,847 14.31 104,300 16.31 4.36

Excise Duty 2,750 0.36 2,610 0.41 5.36

Supplementary Duty (SD): 128,659 16.92 104,850 16.39 22.71

SD on Imports 34,819 4.58 26,501 4.14 31.39

SD on Domestic Goods and Services 93,840 12.34 78,349 12.25 19.77

Other Taxes and Duties: 4,670 0.61 4,690 0.73 -0.43

Travel Tax 4,668 0.61 4,678 0.73 -0.21

Other Taxes & Duties 3 0.0003 13 0.002 -80.00

Sub-Total: NBR Portion 725,900 95.46 610,000 95.38 19.00



Slide 1-15

Tax Structure of Bangladesh

Budget 2010-11 & Revised Budget 2009-10

Tax Revenue

Budget 2010-111 Revised 2009-10 % Increase

over

FY10R Tk. (mn) % Tk. (mn) %

Sub-Total of Taxes: NBR Portion 725,900 95.46 610,000 95.38 19.00

Non-NBR Portion

Narcotics and Liquor Duty 714 0.09 600 0.09 19.00

Taxes on Vehicles 8,700 1.14 6,750 1.06 28.89

Land Revenue 5,490 0.72 3,921 0.61 40.01

Stamp Duty (Non-Judicial) 19,620 2.58 18,290 2.86 7.27

Sub-Total: Non-NBR Portion 34,524 4.54 29,561 4.62 16.79

Total Tax Revenue 760,424 100.00 639,561 100.00 18.90

Non-Tax Revenue 168,049 155,253 8.24

Total Revenues 928,473 794,814 16.82



Slide 1-16

End of the Presentation

Thank you.

Documents

Sessions 04_Classification and Choice of Taxes1