Transcript Theory of Taxation

Theory of Taxation
•Meaning
of Taxation
functions
•Sources of Government revenue
•Types of taxes
•Why Government levies taxes
•Characteristics of a tax
•Canons of taxation
•Kenya Revenue Authority and its departments
•Tax evasion and tax avoidance
•Government
• INCIDENCE AND
EFFECTS OF A TAX
Meaning of Taxation
Taxation is the part of public Finance that deals with
the means by which the government raises revenue
from the public by imposing taxes which revenue is
used by the government to provide goods and
services to the public or its citizens (to carry out
government functions)
…continued
Tax
The amount paid to the taxing authority as direct
cash payment or paid indirectly through purchase of
goods or services. The tax is not paid for any specific
service rendered by the tax authority to the taxpayer.
The tax paid becomes revenue and is used to provide
public goods and services to all citizens.
…continued
Dr. Dalton
Defined the word tax to mean, a compulsory
contribution imposed by a public authority
irrespective of the amount of services rendered to the
tax payers in return for a common purpose.
…continued
Prof. Sellingman
Defined a tax as a compulsory contribution from a
person to the government to defray the expenses
incurred in the common interest of all without
reference to special benefits conferred.
Government Functions
 To maintain internal security and external defence





and carry out general administration
To provide infrastructure and communication
To provide basic social services
To participate in the production and marketing of
commercial goods and services
Influencing and guiding the level and direction of
economic activities
Redistributing income and wealth through taxation
and public spending
Sources of Government revenue







Public revenue is all the amounts which are received by the
government from different sources
Taxes-there are no direct goods or services given to a taxpayer in
return for the tax paid
Fees-an amount which is received for any direct services rendered
by the central or local authority e.g. television and radio fees,
national park fees, airport departure fee
Prices-those amounts which are received by the central or local
authority for commercial services e.g. railway fare, postage and
revenue stamps, telephone charges
External borrowing-done from international financial
institutions such as World Bank and IMF
Fines and Penalties
State Property
Internal Borrowing
Types of taxes








Income tax—tax imposed on annual gains or profits earned by individuals,
limited companies, business and other organisations. e.g. PAYE, Corp tax,
withholding tax,
Value added tax (V.A.T.)—This is tax imposed on sale of commodities and
services introduced in Kenya with effect from 1.1.90( should have a turnover of 5m
or more within a period of 12 months).
Turnover Tax-Is charged on the supply of taxable goods and services supplied in
Kenya by taxable persons of a turnover of less than 5 million within a period of 12
months with effect from 1.1.2007 ( at the rate of 3% as final tax)
Sales tax—This is tax imposed on sale of commodities which was abolished in
Kenya on 31.12.89 and replaced with value added tax.
Excise duty—This is tax imposed on commodities produced locally and
sometimes on certain imports. e.g wines , fermented beverages, beer, locally
assembled vehicles, bottled water etc.
Customs duty—This is tax imposed on import or export of commodities.
Stamp duty—This is tax imposed on the transfer of property.
Land, rent and rates—This is tax imposed on property. Rent is paid to the
central government on some land leases while rates are paid to the local authority
based on the value of property.
Why the government levies taxes
 Raising Revenue
 Economic Stability
 Protection Policy
 Social Welfare
 Fair Distribution Of Income
 Allocation Of Resources
 Increase In Employment
Characteristics of a Tax
 A compulsory contribution, all eligible must pay




tax.
Tax is a “non quid pro quo” payment i.e. there is
no direct reward upon payment of tax.
Penalties are imposed where a person fails to
contribute tax.
Tax is a payment made by the tax payers for
common benefit.
Tax is charged in relation to income generating
activity, consumption or expenditure.
Canons or principles of an optimal Tax System
 An optimal (good) tax system must help achieve
increased economic growth, maintain economic
stability and increased distribution of income. It is a
system that should exhibit or satisfy most if not all of
the principles of good tax system.
…continuation




The four main canons of a good tax system that were
advanced by Mr. Adam Smith
Equity or justice
Certainty
Convenience
Economy or administrative efficiency
…continuation
Other principles include;
 Productivity
 Elasticity or Buoyancy
 Flexibility
 Diversity
 Reliability
 Neutrality
 Simplicity
 Evidence
 Taxable capacity
 Competitiveness
Equity or justice
“The subjects of every state ought to contribute according
to their respective ability, i.e., in proportion of the
revenue which they respectively enjoy under the
protection of the state”…Adam Smith
This means that the rich should pay more and at a higher
rate than the poor. It implies equality of sacrifice. Equity
can also be explained as horizontal equity and vertical
equity i.e. similar treatment of persons in similar
circumstances and dissimilar treatment of persons in
dissimilar circumstances respectively.
Certainty
The tax that an individual or person is bound to pay
ought to be certain and not arbitrary; uncertainty
breeds corruption.
 The time of payment, manner of payment, amount to
be paid ought to be clear
 The state needs to be sure with regard to the
amount of the revenue and the time when it is
expected to flow to the exchequer
Convenience
It means that both the time and manner of payment
or collection of the taxes should be convenient to the
tax payer
 Payment of VAT or excise duty by the consumer is
convenient because they pay the taxes when they buy the
commodity and at a time when they have the means to
pay. The manner of payment is also convenient since
these taxes are already included in the prices of goods.
 Also, in the case of PAYE tax, it is collected at the end of
the month by the employer who delivers the tax to the
Pay Master General on or before the 9th day of the
following month.
Economy or administrative efficiency
This refers to the ability of the tax authority to
collect taxes at a minimum cost both to the tax
payer and the taxing authority.
 It should be economical for the state to collect the
taxes
 Tax payment should be economical to the tax payer
Productivity
A tax should be productive in the sense that it should
bring in large revenue which should be adequate
for the government. This does not mean overtaxing
by the government. A single tax which brings in large
revenues is better than many taxes that bring in little
revenue (Introduction of VAT which replaced Sales
Tax).
Elasticity or Buoyancy
The government should be capable of varying
(increasing or reducing) rates of taxation in
accordance to the circumstances in the economy, e.g.
if government requires additional revenue, it should
be able to increase the rates of taxation.
Flexibility
There should be no rigidity in taxation i.e. the tax
system can be changed to meet the revenue
requirement of the state; both the rate and
structure of taxes should be capable of change or
being changed to reflect the state’s requirements
such that certain old taxes are discouraged while new
ones are introduced. The entire tax structure should
be capable of change.
Diversity
It means that there should be variety or diversity in
taxation. That the tax base should be wide enough so
as to raise adequate revenue and also the tax burden
is evenly distributed among the tax payers.
Reliability
It should be adequate to provide services to the tax
payers.
Neutrality
This is the extent to which tax avoids distorting the
working of the price mechanism i.e. the working of
the forces of demand and supply within an economy.
A neutral tax is one which minimizes substitution
effects. A tax should not be allowed to interfere with
the market economy
Simplicity
A tax system should be simple, plain and
intelligible enough to enable a common tax payer
to understand it and be able to compute his own tax
liability. Simplicity is desirable to avoid difficulties,
inefficiencies and corruption.
Evidence
It refers to the awareness on the part of the
taxpayers or society that what they pay as tax
accrues certain tangible or intangible
benefits. (The taxing authority should strive to
show the taxman some of the contributions they
have made e.g. developmental issues)
Taxable capacity
Refers to the ability of the taxpayer to pay tax.
The higher the taxable capacity, the higher the
revenue that will be collected from a particular
person, group or society.
Competitiveness
 The tax system adopted should be competitive
enough compared to other tax systems
internationally or regionally.
Tax Administration In Kenya
 The collection of public revenue is administered
under the treasury through revenue departments
operating under Kenya Revenue Authority. It is
headed by a C.E.O who is the Commissioner
General and reports to the BOD of KRA.
…continued
The Kenya Revenue Authority was established
by an Act of Parliament on July 1st 1995 Cap. 469 for
the purpose of enhancing the mobilization of
Government revenue, while providing effective tax
administration and sustainability in revenue
collection. The Board and Management of KRA have
since its inception spent time and resources setting
up systems, procedures and the adoption of new
strategies aimed at enhancing the operational
efficiency of the Authority's processes.
…continued














In order to realize its mandates, the Authority administers the following written
laws relating to revenue: The Income Tax Act (Cap. 470).
The Customs and Excise Act (Cap.472).
The Value Added Tax Act (Cap.476).
The Road Maintenance Levy Fund Act 1993 (No.9 of 1993).
The Air Passenger Service Charge Act (Cap. 475).
The Entertainment Tax Act (Cap. 479).
The Traffic Act (Cap. 403).
The Transport Licensing Act (Cap. 404).
The Second Hand Motor Vehicle Purchase Tax Act (Cap. 484).
The Widows and Children’s Pensions Act (Cap. 195).
The Parliamentary Pensions Act (Cap.196).
The Stamp Duty Act (Cap. 480).
The Betting, Lotteries and Gaming Act (Cap.131).
The Directorate of Civil Aviation Act (Cap.394).
Functions of KRA
 Administer and enforce written laws and specified provisions of written laws







pertaining to assessment and collection and accounting of all revenue in accordance
with the law.
To advise on all matters relating to the administration of and collection of revenue
under the written laws.
Enhance efficiency and effectiveness of tax administration by eliminating
bureaucracy and promoting training and discipline.
Ensure protection of local industries and facilitate economic growth through
effective administration of tax laws relating to trade.
Eliminate tax evasion by simplifying and stream lining procures and improving tax
payers services and education to increase the rate of compliance.
Act as a watchdog for the government agencies such as ministry of finance by
controlling exit and entry points to the country to ensure that prohibited and illegal
goods don’t pass through the Kenyan border.
Ensure effective allocation of scarce resources with the socially acceptable projects
in the economy by designing effective tax policies to encourage economic growth.
To perform such other functions in relation to revenue as the minister may direct.
Tax Evasion and Tax Avoidance
 Tax Evasion: is where the taxpayer deliberately
tries to avoid paying tax by not declaring his true
income.
 Tax Avoidance: is where the tax payer arranges
his affairs and finances in such a way that he will be
required to pay less tax.
Incidence verses effects of a tax
 Incidence of a tax is its direct money burden equal to
the total tax collections going to the treasury.
 Effects of a tax refer to its real burden both direct
and indirect e.g. sacrifice of economic welfare or
reduced consumption of a commodity.
 Incidence of a tax leads to the effect of the tax. It is
the incidence of a tax that may be shifted.
Tax shifting
 It is the process whereby the money burden of a tax
(incidence of a tax) is transferred from one person to
another. It is often brought about by changes in
prices of goods or services due to the imposition of
tax. It may be shifted backward or forward. It may
also be shifted entirely or partially.
 Forward tax shifting normally occurs in the case of
indirect taxation.