Course No.

4135:

Taxation

Classification and Choice of Taxes

Tax Structure in Bangladesh

Key Words / Outline

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Issues to be discussed:
Classification Taxes Choice of Taxes between - Proportional and Progressive taxes - Direct and Indirect taxes Tax Structure in Bangladesh

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Classification of Taxes
Basis Classification

Number of taxes
Impact and incidence of taxes Structure of tax-rates

Single tax: when a country has only one tax. Multiple tax: when a country has more than one tax.
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.) 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 the tax 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

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Classification of Taxes
Tax-Base (Tk.) Proportional Tax
10,000 20,000 30,000 40,000

Total Tax (Tk.)

1,000 2,000 3,000 4,000

Marginal Tax Rate

10% 10% 10% 10%

Tax-Base (Tk.) Progressive Tax

10,000 20,000 30,000 40,000

Total Tax (Tk.)

1,000 2,500 4,500 7,000

Marginal Tax Rate

10% 15% 20% 25%

Tax-Base (Tk.) Regressive Tax

10,000

Total Tax (Tk.)

1,000

Marginal Tax Rate

10%

20,000
30,000 40,000

1,900
2,700 3,300

9%
8% 6%

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Classification of Taxes
Basis Classification

Subjectmatter of taxes
Elasticity 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)
Elastic tax: when a tax produces more revenue with increase in tax rate and/or tax-base Inelastic tax: when a tax produces equivalent or lower revenue with increase in tax rate and/or tax-base
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 the owner 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

Classification of tax-bases

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Classification of Taxes
Basis Classification

Increase or decrease in public revenue Collector of taxes

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 Central tax: when a tax is collected by a central government Local tax: when a tax is collected by a local government

Choice of Taxes: Proportional vs. Progressive Taxes

Arguments in favour Proportional Tax 1. Complexity in deciding upon a precise and appropriate degree of progression, and proportional tax is considered as better alternative 2. 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 tax 5. 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 Progressive Tax

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1. Consistent with the ability-to-pay principles 2. Contribution to economic growth and stability 3. 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 rates 6. 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

Choice of Taxes: Proportional vs. Progressive Taxes

Arguments against
Proportional 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 more heavily 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 the richer 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 rate for the small income-earner is already heavy Progressive Tax

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1. Fear of communism by the antiCommunists (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 for more 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 evade a steeply graduate tax

Choice of Taxes: Direct vs. Indirect Taxes

Point Direct Tax

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Distinctions

Indirect Tax

1. Impact and incidence 2. Subjectmatter 3. Elasticity of tax 4. Tax-base

In this case, both impact and incidence lie on same person or enterprise. Direct taxes are usually personal taxes. If direct tax is progressive, then it is also elastic.

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. Indirect taxes are usually in rem taxes. Indirect taxes are usually inelastic.

Usually, the tax-bases of direct Usually, the tax-bases of indirect tax are tax are income, wealth or transactions and production. people (in case of poll tax). Collection cost of direct tax is usually high due to evading tendency of taxpayers. In reality, direct taxes are progressive and hence, largely equitable. Incidence usually falls on consumers and hence the producers/sellers collect the tax from buyers/ consumers for Govt. & collection cost is low. Indirect taxes are usually regressive and hence, inequitable.

5. Tax collection cost 6. Equity

Choice of Taxes: Direct vs. Indirect Taxes

Arguments in favour

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Direct 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 generating a 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.

Indirect Tax 1. Advantageous to pay and comprehensive tax payment. 2. Voluntary. 3. Does not make any harm to work-effort and initiative. 4. Flexible. 5. Can be used for special purpose. 6. Tax-evasion is list possible.

Choice of Taxes: Direct vs. Indirect Taxes

Arguments against

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Direct Tax 1. Disincentive effect against motivation 2. Stops or discourages work-effort and initiative 3. Encourages tax-evasion and taxavoidance 4. Discourages domestic and foreign investment 5. High collection cost 6. Reduces savings 7. Narrowness of scope 8. Unpopular

Indirect Tax 1. Regressive 2. Penalizes certain consumption 3. Does harm to concerned industry 4. Increases price 5. Difficult to determine the impact of incidence of tax

Tax & Nontax Revenues in Bangladesh

Tax Revenue NBR Portion
1. 2. 3. 4. 5. 6. Taxes on Income and Profit Value Added Tax (VAT) Import Duty Excise Duty Supplementary Duty (SD) Other Taxes and Duties

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Non-Tax Revenue
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Dividend and Profit Interest Administrative Fees and Charges Fines, Penalties and Forfeiture Receipts for Services Rendered Rents, Leases and Recoveries Tolls and Levies Non-Commercial Sales Defence Receipts Other Non-Tax Revenue and Receipts Railway Post Offices Telegraph and Telephone Board Capital Revenue

Non-NBR Portion
1. 2. 3. 4. Narcotics and Liquor Duty Taxes on Vehicles Land Revenue Stamp Duty (Non Judicial)

Tax Structure of Bangladesh

Budget 2010-11 & Revised Budget 2009-10
Budget 2010-11 Types of Taxes Direct Tax Taxes on Income and Profit Other Direct Taxes* Indirect Tax Border Taxes Domestic Taxes Total Taxes
Tk. (mn) Revised 2009-10 Tk. (mn)

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% Increase over FY10R

% 30.10 25.89 4.21 69.90 36.40 33.50 100.00

239,830 210,050 29,780 520,594 258,350 262,244 760,424

31.54 192,501 27.62 165,600 3.92 26,901 68.46 447,060 33.97 232,801 34.49 214,259 100.00 639,561

24.59 26.84 10.70 16.45 10.97 22.40 18.90

Tax-GDP Ratio
Revenue-GDP Ratio

9.75
11.90 Direct Tax 28.60% Tax-GDP Ratio 9.03%

9.26
11.51 Indirect Tax 71.40% Revenue-GDP Ratio 11.25%

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

2008-09 (Revised Budget):

Tax Structure of Bangladesh

Budget 2010-11 & Revised Budget 2009-10
Tax Revenue NBR Portion Taxes on Income and Profit Value Added Tax (VAT): VAT on Imports Budget 2010-111 Tk. (mn) 210,050 270,864 114,684 % 27.62 35.62 15.08 Revised 2009-10 Tk. (mn) 165,600 227,890 102,000 % 25.89 35.63 15.95

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% Increase over

FY10R 26.84 18.86 12.44

VAT on Domestic Goods and Services

Turnover Tax (TT) Import Duty Excise Duty Supplementary Duty (SD): SD on Imports

156,180
60 108,847 2,750 128,659 34,819

20.54
0.01 14.31 0.36 16.92 4.58

125,890
60 104,300 2,610 104,850 26,501

19.68
0.01 16.31 0.41 16.39 4.14

24.06
--4.36 5.36 22.71 31.39

SD on Domestic Goods and Services

Other Taxes and Duties: Travel Tax Other Taxes & Duties Sub-Total: NBR Portion

93,840
4,670 4,668 725,900

12.34
0.61 0.61 95.46

78,349
4,690 4,678 13 610,000

12.25
0.73 0.73 0.002 95.38

19.77
-0.43 -0.21 -80.00 19.00

3 0.0003

Tax Structure of Bangladesh

Budget 2010-11 & Revised Budget 2009-10
Budget 2010-111 Tax Revenue Sub-Total of Taxes: NBR Portion Non-NBR Portion Narcotics and Liquor Duty Taxes on Vehicles Land Revenue Stamp Duty (Non-Judicial) Sub-Total: Non-NBR Portion Total Tax Revenue Non-Tax Revenue Total Revenues 714 8,700 5,490 19,620 34,524 760,424 168,049 928,473 0.09 1.14 0.72 2.58 4.54 600 6,750 3,921 18,290 29,561 155,253 794,814 0.09 1.06 0.61 2.86 4.62 100.00 Tk. (mn) 725,900 % Revised 2009-10
Tk. (mn)

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% 95.38

% Increase over FY10R

95.46 610,000

19.00 19.00 28.89 40.01 7.27 16.79 18.90 8.24 16.82

100.00 639,561

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End of the Presentation

Thank you.