Taxation

INTRODUCTION
The most important source of revenue of the government is taxes. The act of levying taxes is
called taxation. A tax is a compulsory charge or fees imposed by government on individuals or
corporations. The persons who are taxed have to pay the taxes irrespective of any corresponding
return from the goods or services by the government. The taxes may be imposed on the income
and wealth of persons or corporations and the rate of taxes may vary.

HISTORY
The first known system of taxation was in Ancient Egypt around 3000 BC - 2800 BC in the first
dynasty of the Old Kingdom. The earliest and most widespread form of taxation was the corvée
and tithe.

Later, in the Persian Empire, a regulated and sustainable tax system was introduced by Darius I
the Great in 500 BC.

In India, Islamic rulers imposed jizya (a poll tax on non-Muslims) starting in the 11th century. It
was abolished by Akbar.

Numerous records of government tax collection in Europe since at least the 17th century is still
available today.
DEFINITION
To tax (from the Latin taxo; "I estimate") is to impose a financial charge or other levy upon a
taxpayer (an individual or legal entity by a state or the functional equivalent of a state such that
failure to pay is punishable by law.

o Thomas M. Cooley- Taxation is the inherent power of the state to impose and demand
contribution for public purpose.
o Adams Smith- A tax is a contribution from citizens for the support of the state.
o Prof. Seligman- A tax is a compulsory contribution from the person to the State to defray
(carry) the expenditure incurred in the common interest of all without any reference to
the special benefits conferred.
o Hugh Dalton- A tax is a compulsory contribution imposed by a public authority
irrespective of the exact amount of service rendered to the taxpayer in return.

OBIECTIVES OF TAXES
 Raising Revenue
 Regulation of Consumption and Production
 Encouraging Domestic Industries
 Stimulating Investment
 Reducing Income Inequalities
 Promoting Economic Growth
 Development of Backward Regions
 Ensuring Price Stability
PRINCIPLES OF TAXATION
Economists and political philosophers have proposed two major principles for organizing a tax
system:

 The benefit principle- which holds that individuals should be taxed in proportion to the
benefit they receive from government programs. Just as people pay dollars in proportion
to their consumption of private goods like bread, a person's taxes should be related to his
use of collective goods like public roads or parks.
 The ability-to-pay principle- which states that the amount of taxes people pay should
relate to their income or wealth. The higher the wealth or income, the higher the taxes.
Usually tax systems organized on the ability-to-pay principle are also redistributive,
meaning that they raise funds from higher-income people to increase the incomes and
consumption of poorer groups. For instance, if the construction of a new bridge is funded
by tolls on the bridge, that's a reflection of the benefit principle, since you pay for the
bridge only if you use it. However, if the bridge were funded out of income-tax collections,
that would be an example of the ability-to-pay principle.

There are also some of the leading principles that can shape decisions about taxation.

 Horizontal equity: The principle of horizontal equity assumes that persons in the same or
similar positions (so far as tax purposes are concerned) will be subject to the same tax
liability. In practice this equality principle is often disregarded, both intentionally and
unintentionally.
 Economic efficiency: The requirement that a tax system be efficient arises from the nature
of a market economy. Although there are many examples to the contrary, economists
generally believe that markets do a fairly good job in making economic decisions about
such choices as consumption, production, and financing. Thus, they feel that tax policy
should generally refrain from interfering with the market’s allocation of economic
resources. That is, taxation should entail a minimum of interference with individual
decisions
 Ease of administration and compliance: In discussing the general principles of taxation,
one must not lose sight of the fact that taxes must be administered by an accountable
authority. There are four general requirements for the efficient administration of tax
laws: clarity, stability (or continuity), cost-effectiveness, and convenience. Administrative
considerations are especially important in developing countries, where illiteracy, lack of
 commercial markets, absence of books of account, and inadequate administrative
resources may hinder both compliance and administration.
 Clarity: Tax laws and regulations must be comprehensible to the taxpayer; they must be
as simple as possible (given other goals of tax policy) as well as unambiguous and
certain—both to the taxpayer and to the tax administrator. every country has tax laws
that are far from being generally understood by the public. This not only results in a
considerable amount of error but also undermines honesty and respect for the law and
tends to discriminate against the ignorant and the poor, who cannot take advantage of
the various legal tax-saving opportunities that are available to the educated and the
affluent. At times, attempts to achieve equity have created complexity, defeating reform
purposes.
 Stability: Tax laws should be changed seldom, and, when changes are made, they should
be carried out in the context of a general and systematic tax reform, with adequate
provisions for fair and orderly transition. Frequent changes to tax laws can result in
reduced compliance.
 Cost-effectiveness: The costs of assessing, collecting, and controlling taxes should be kept
to the lowest level consistent with other goals of taxation. Clearly, equityd economic
rationality should not be sacrificed for the sake of cost considerations. The costs to be
minimized include not only government expenses but also those of the taxpayer and of
private fiscal agents such as employers who collect taxes for the government through the
withholding procedure.
 Convenience: Payment of taxes should cause taxpayers as little inconvenience as possible,
subject to the limitations of higher-ranking tax principles. Governments often allow the
payment of large tax liabilities in installments and set generous time limits for completing
returns.
 Economic goals: The primary goal of a national tax system is to generate revenues to pay
for the expenditures of government at all levels. Because public expenditures tend to
grow at least as fast as the national product, taxes, as the main vehicle of government
finance, should produce revenues that grow correspondingly.
 Shifting and incidence: The incidence of a tax rests on the person(s) whose real net income
is reduced by the tax. It is fundamental that the real burden of taxation does not
necessarily rest upon the person who is legally responsible for payment of the tax.
General sales taxes are paid by business firms, but most of the cost of the tax is actually
passed on to those who buy the goods that are being taxed. In other words, the tax is
shifted from the business to the consumer.
CANONS OF TAXATION
Adam Smith, the eighteenth Century British Economist laid down four basic canons of taxation
on which a good tax system should be based, in his book WEALTH OF NATIONS- 1776.

Four canons of taxation:

I. The canon of equity/ability- all citizens of the nation should contribute towards expenses
of the Government in proportion to their respective abilities. The ability to pay taxes
increases with the rise in income, thus making the higher economic class to contribute
more to the Government revenue.
II. The canon of certainty- the tax which each individual is required to pay should be certain
and not arbitrary. The time of payment, the manner of payment and the amount to be
paid should be clear to every tax payer.
III. The canon of convenience- the mode and timings of tax payment should be convenient
to the tax payer. Ex: In India Govt. collects income tax when citizens receive salaries.
IV. The canon of economy- Every tax involves some revenue yield and a corresponding cost
of collection. The canon of economy implies that the cost of tax collection should be
minimum.

Modern economists have added more in the list of canons of taxation, these are

V. Canon of productivity- taxes must be productive or cost-effective. This implies that the
revenue yield from any tax must be a sizable one. Further, this canon states that only
those taxes should be imposed that do not hamper productive effort of the community.
A tax is said to be a productive one only when it acts as an incentive to production.
VI. Canon of elasticity- Modern economists attach great importance to the canon of
elasticity. This canon implies that a tax should be flexible or elastic in yield. It should be
levied in such a way that the rate of taxes can be changed according to exigencies of the
situation. Whenever the government needs money, it must be able to extract as much
income as possible without generating any harmful consequences through raising tax
rates. Income tax satisfies this canon.
VII. Canon of simplicity- Every tax must be simple and intelligible to the people so that the
taxpayer is able to calculate it without taking the help of tax consultants.
A complex as well as a complicated tax is bound to yield undesirable side-effects. It may
encourage taxpayers to evade taxes if the tax system is found to be complicated.
VIII. Canon of diversity- Taxation must be dynamic. This means that a country's tax structure
ought to be dynamic or diverse in nature rather than having a single or two taxes.
Diversification in a tax structure will demand involvement of the majority of the sectors
of the population.
CLASSIFICATION OF TAX
Based on incidence (who bears the burden), there are two types of tax:

1. Direct tax
2. Indirect tax

Direct Tax
Direct taxes are imposed by the state upon persons who are expected to bear the burden of these
taxes and who are not expected to be able to shift the tax burden to other persons. In other
words, in the case of direct taxes, impact and incidence are on the one and the same person.

TYPES OF DIRECT TAX

 Income tax: It is based on one’s income. A certain percentage is taken from a worker’s
salary, depending on how much he or she earns. The good thing is that the government
is also keen on listing credits and deductions that help lower one’s tax liabilities.
 Transfer taxes: The most common form of transfer taxes is the estate tax. Such a tax is
levied on the taxable portion of the property of a deceased individual, including trusts
and financial accounts. A gift tax is also another form wherein a certain amount is
collected from people who are transferring properties to another individual.
 Entitlement tax: This type of direct tax is the reason why people enjoy social programs
like Medicare, Medicaid, and Social Security. The entitlement tax is collected through
payroll deductions and is collectively grouped as the Federal Insurance Contributions Act.
 Property tax: Property tax is charged on properties such as land and buildings and is used
for maintaining public services such as the police and fire departments, schools and
libraries, as well as roads.
 Capital gains tax: This tax is charged when an individual sells assets such as stocks, real
estate, or a business. The tax is computed by determining the difference between the
acquisition amount and the selling amount.
  Corporation tax: A corporate tax is a tax on the profits of a corporation. The taxes are
paid on a company's taxable income, which includes revenue minus cost of goods sold
(COGS), general and administrative (G&A) expenses, selling and marketing, research and
development, depreciation, and other operating costs.
 Gift tax: A gift tax is the tax on money or property that one living person or corporate
entity gives to another. A gift tax is a type of transfer tax that is imposed when someone
gives something of value to someone else.

ADVANTAGES OF DIRECT TAX

1. Promotes equality
2. Promotes certainty
3. Promotes elasticity
4. Saves time and money
5. Social impact
6. Distribute justice
7. Social and economic balance
8. Higher productivity
9. Control of inflation
10. Progressive Regime

DISADVANTAGES OF DIRECT TAX

1. Unpopular
2. Possibility of Evasion
3. Necessity of assessment
4. Direct Taxes tend to be Arbitrary
5. Narrow Base
6. Uneconomical
7. Disincentiveness
8. Inconvenient
Indirect Tax
An indirect tax is collected by one entity in the supply chain, such as a manufacturer or retailer,
and paid to the government; however, the tax is passed onto the consumer by the
manufacturer or retailer as part of the purchase price of a good or service. The consumer is
ultimately paying the tax by paying more for the product.

TYPES OF INDIRECT TAX

 Excise Tax: An excise tax is a tax imposed on a specific good or activity. Excise taxes are
commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums,
amusement activities, and betting, and typically make up a relatively small and volatile
portion of state and local and, to a lesser extent, federal tax collections.
 Sales Tax: A sales tax is levied on retail sales of goods and services and, ideally, should
apply to all final consumption with few exemptions. Many governments exempt goods
like groceries; base broadening, such as including groceries, could keep rates lower. A
sales tax should exempt business-to-business transactions which, when taxed, cause tax
pyramiding.
 Value-Added Tax (VAT): A Value-Added Tax (VAT) is a consumption tax assessed on the
value added in each production stage of a good or service. Every business along the value
chain receives a tax credit for the VAT already paid. The end consumer does not, making
it a tax on final consumption.
 Customs duty tax: Customs Duty is a tax imposed on imports and exports of goods.
Description: The rates of customs duties are either specific or on ad valorem basis, that
is, it is based on the value of goods.
 Stamp Duty: This is a tax levied on the transfer of any immovable property in a state of
India. The state government in whose state the property is located charges this type of
tax. Stamp tax is also applicable on all legal documents too.
 Entertainment Tax: This tax is charged by the state government and is applicable on any
products or transactions related to entertainment. Purchasing of any video games, movie
shows, sports activities, arcades, amusement parks, etc. are some of the products on
which Entertainment Tax is charged.
 Securities Transaction Tax: This tax is levied during the trading of securities through Stock
Exchange.
 Service tax: This tax is levied by an entity in return for the service provided by them. The
service tax is collected by the Government of India and deposited with them.
ADVANTAGES OF INDIRECT TAX

1. Convenience
2. Ease of collection
3. Collection from the poor
4. Equitable contributions
5. Reduce Negative Consumption
6. Inevitable to Escape
7. Broad-based
8. Elastic
9. Equitable
10. Check Harmful Consumption

DISADVANTAGES OF DIRECT TAX

1. Uncertain
2. Raising Prices Unduly
3. No Civic Consciousness
4. Uneconomical
5. Harmful to Industries
6. Cumulative
7. Regressive
DIFFERENCE BETWEEN DIRECT & INDIRECT TAX

Direct Taxes Indirect Taxes

1. Paid directly to government 1. Collected by businesses/individuals for
gov. and passed to consumers
2. Examples: income tax, corporate tax, 2. Examples: VAT, excise tax, customs duty
property tax
3. Burden falls on individual/business 3. Burden falls on consumers through
goods/services price
4. Based on income/wealth 4. Based on consumption of goods/services
5. More complex to administer, need 5. Easier to administer, collected at point of
detailed info sale
6. Used to redistribute wealth and promote 6. Used to influence consumer behavior and
social objectives discourage consumption
7. Can be progressive, proportional, or 7. Can be regressive, disproportionately
regressive affects low-income
8. Often subject to tax evasion and 8. Less subject to evasion/avoidance due to
avoidance point-of-sale collection
9. Based on ability to pay (i.e., higher 9. Not based on ability to pay (i.e., everyone
earners pay more) pays the same rate)
10. Paid by individuals, corporations, and 10. Paid by consumers, but ultimately
other entities collected by businesses/individuals
11. Usually calculated and paid annually 11. Paid continuously as goods/services are
purchased
12. Can be withheld from paychecks or paid 12. Cannot be withheld and must be paid at
quarterly the time of purchase
13. Generally not avoidable (except through 13. Can be avoided through non-
legal tax planning) consumption or substitution of
goods/services
14. Typically has a higher compliance rate 14. Typically has a lower compliance rate
15. Often considered more fair and equitable 15. Often considered less fair and equitable
16. Can have a greater impact on economic 16. Can have a greater impact on consumer
incentives behavior
CLASSIFICATION OF TAX

Based on degree
of progression of
tax.

Proportional
Progressive taxation Regressive taxation Degressive taxation
taxation

the rate of taxation the rate of taxation

the rate of taxation the rate of taxation
increases as the tax does not increase in
remains constant as decreases as the tax
payer's income the same proportion
the income of the payer's income
increase as they increase in
taxpayer increases, increases. lower income. in this case,
all incomes are taxed income is taxed at a the rate of tax
at a single uniform higher rate, whereas increases up to a
rate, irrespective of higher income is certain limit, after
whether taxpayers taxed at a lower rate that a uniform rate is
income is high or low
changed

NATIONAL BOARD OF REVENUE

The National Board of Revenue (NBR) is the Central Authority for Tax Administration in
Bangladesh. It is a Statutory Authority attached with the Internal Resources Division of Ministry
of Finance. NBR is the Authority for Tax Policies and Tax Laws in Bangladesh.

ESTABLISHMENT
Sheikh Mujibur Rahman in 1972 through the Presidential Order No 76 (The National Board of
Revenue Order, 1972), Latest amendment to the structure of the BR through Act No 12 of 2009

STRUCTURE
The NBR has 1 Chairperson and 8 members - 4 for direct tax and 4 for indirect tax. The secretary
of internal resources division acts as the ex-officio chairman of the Board. There are 45
departments/directorates under the NBR, of which 25 are related to direct tax and 20 related to
indirect tax.
NBR (NATIONAL BOARD OF REVENUE) FUNCTION
1) To collect tax revenues (primarily VAT, Customs duty, Excise Duty and Income tax)
2) Formulation and continuous re-appraisal of tax policies and tax laws
3) Negotiating tax treaties with foreign governments
4) Participating in inter-ministerial deliberations on economic issues having bearing on fiscal
policies and tax administration.
5) Achieving full employment.
6) Taking hold of distribution of society’s income and to make sure that there is a perfect
balance in the country’s society
7) Have control over the consumption and production as well.
8) Monitoring, imposition and detailing and constructing the guidelines, laws and rules on
the collection of direct and indirect taxation.
9) NBR monitors those organizations' activities and it is a major function that holds the
responsibility or deals with the collection of VAT, supplementary duty, import duty,
export duty, income tax.
10) Limit smuggling taking place and also tax evasion at the same time and to implement
different policies

INCOMETAX RATES IN BANGLADESH

The tax-free income threshold remain unchanged at Tk 3 lakh for individual taxpayers for the
fiscal year 2021-2022. According to the BR, the existing tax-free income limit is Tk 3.50 lakh for
women and senior citizen taxpayers, Tk 4.50 lakh for physically challenged people, Tk 4.75 lakh
for gazetted war-wounded freedom fighters. The range of income tax is from the lowest 5 per
cent to the highest income tax rate of 25 per cent on annual income.
LIMITATIONS OF BD TAX SYSTEM
1. Low tax to GDP ratio: The tax-to-GDP ratio is a ratio of an economy's tax revenue
relative to its gross domestic product (GDP) or the market value of goods and services a
country produces The higher the GOP the more tax a nation should collect. IMF- 15% foi
developing country. An increased tax to GDP ratio can fund state operations sufficiently
and overcome deficiencies in budet while the lowe rate shows the goverment
ineffectively controls its economic resources and below-par resource mobilization
impeded economic growth and social development. Bangladesh's tax-GDP ratio is one of
the lowest in the South Asian region. (9.3% in FY 2019-2020)

2. High tax evasion: Tax evasion occurs when individuals deliberately do not comply with
their tax obligation. In Bangladesh, a large number of individuals and firms are
unregistered and the vast majority of registered individuals and firms fail to pay right
taxes. Tax evasion can have many forms. In Bangladesh, businessmen who collect value
added tax from consumers also evade tax by under-reporting the same. Importers avoid
tax by under-invoicing. Two-thirds of the eligible tax payers evade taxes in Bangladesh.
the NBR for difficulties in monitoring thus, increasing percentage of tax defaulters and
tax evasion. High tax rates, multiple tax rates, complexity of tax laws, corruption among
tax payers and collectors and inefficiency of tax authorities are the main causes of high
tax evasion in Bangladesh.
3. Reluctance/ lack of interest in paying taxes: People like to be assured that their money
is being used for the right cause. A majority of the people feel our tax system is
unnecessarily complicated wrecked by age-old corruption and incompetence.
 Individuals with taxable income are not interested in paying taxes because they think
there is no level playing field when it comes to paying taxes. Some get demoralized
seeing rich people and big companies not pay taxes property. Honest taxpayers, who
pay taxes on a regular bass, become frustrated seeing such unfair government policies.
Also, this encourages many individuals and companies to abstain from paying taxes
because they can in future take advantage of a low tax rate when such an amnesty is
offered.
4. Low level of resource mobilization: As income tax is one of the major sources of the
NBR's revenue, the policy of tax collection requires a complete overhaul to induce
higher revenue mobilization. There are ample opportunities to increase tax revenue
collection as under the current practices, the burden of tax lies on a limited number of
persons/ companies with higher marginal income tax rates (250000tk).
5. High levels of property transaction taxes: A large number of transactions in real estate
are not reported or are underreported for high levels of property transaction taxes,
commonly in the form of stamp duty.
6. Tax exemptions: The extensive use of tax exemptions, incentives and special provisions
also limits revenue collection as the effective tax base becomes much narrower than
that of the standard tax regime. Generally, widespread exemption encourages tax
evasion, erodes tax equity and creates distortions in the economy. Various other tax
breaks legally keep many more people off the tax roll.
7. Defective systems: The system is defective. It is defective because of two reasons. One
is, we have inconsistencies in our structure. Secondly, the system has given too much
discretion to the officers. As a result, many, not all. Of them take advantage and that
leads to corruption.
8. Narrower the tax base: The base of tax is much narrower because there are many
critical factors in the bureaucracy so the time has changed but the pattern does not
change at all.
9. Corruption of tax collectors: The tax collector take the bribe from the people, in our
country a TIN holder first appoint lawyer for calculating his tax then he gives his tax at
the Bank then also pay bribe to the tax collector for approving the payment so it is vary
unfortunate for the people that they have to pay the more money for the payment,
sometimes it is much higher then the actual tax payment. So the collectors also play a
bigger role for the non-payment of tax.
10. Poor amount of direct tax collection: The taxable annual income in Bangladesh starts at
Taka 165,000. For women and those above 70 it starts at Taka 180,000. In India it starts
at Rupees 150,000. For women it starts at Indian Rupees 180,000 and for those above
65 at Rupees 225,000. The higher tax rates in Bangladesh show that the Bangladeshis
 pay more tax than the Indians. The gap in the tax rates for men and women is also
narrower than that of India.
11. Cultural problem: Tax evasion is a cultural problem. I personally feel it is very sad but
my realization is that this is the truth. We want to get rich overnight by hook or by
crook. In the process, we don't mind trampling the rights and interests of others,
defrauding the government…cheating the customers. We are ready to do it as long as
our bank account keeps going up.
12. Lack of respecters: The government officer doesn't respect to the citizen though they
are paid by the citizen's money but when they want to pay the tax the officer just
treated them badly.

RECOMMENDATIONS
 The present Income Tax Ordinance, 1984 is outdated to keep pace with the changing need
of time. So, a new income
 Tax code is needed with proper simplifications of tax laws and encourage voluntary
compliance
 Proper processing of information to assess individuals or organizations tax liabilities,
available under the annual. information return to improving tax compliance. Also, review
of multiple VAT rates that created distortion in taxation
 Boarding the tax base so that everyone can makes some contribution to pay their tax
 Keeping tax rate as low as possible so that all kinds of people can contribute
 Utilizing the best of the income tax. Contribute the most to the development of the
country
 Reducing the corruption in the government officer
 Take morale steps and introducing the new methodology for the development of the
officer
 Take steps to collect the direct Tax.
 Up dare the Tariff system
 Reducing the cost of tax collection
 Train the employees who collects tax