chapter 8 introduction to government finance · principles of taxation • adam smith has given 4...
TRANSCRIPT
Chapter 8
Introduction to Government
FinanceIbrahim Sameer (MBA - Specialized in Finance,
B.Com – Specialized in Accounting & Marketing)
www.ibrahimsameer.wordpress.com
Purpose of Government Tax
• Taxes are mainly used to finance the expenses
incurred by government to manage an
economy. These expenses include: health care,
education and operating government business
entities. Taxation is also used by government for
several other purposes.
Purpose of Government Tax
• To reduce pollution by taxing offending firms
• To discourage unhealthy lifestyle e.g. a tax on
cigarettes
• To achieve greater equality of wealth and income.
Revenue from taxation is used to help the very
poor e.g. providing food stamps.
• To control spending in an economy thus reduce
inflation
Principles of Taxation
• Adam Smith has given 4 canon (rules) of taxation:
• Canon of Equity
• Canon of Ability
• Canon of Convenience
• Canon of Economy
Canon of Equity
• The burden of tax should be equal for everyone. In
other word the people who get more money pay
more tax and the people who get less earning pay
less.
Canon of Ability
• The taxpayer should know for certain how much
he/she will have to pay for tax.
Canon of Convenience
• There should be convenience of payment for the
taxpayer. It should not be burden for taxpayer to
pay tax.
Canon of Economy
• Taxes should not be imposed if their cost of
collection is excessive.
Equity in Taxation
• The major source of financing government
expenditure is through taxation.
• Individual are obliged to pay a portion of their
income to the government.
Equity in Taxation
• Let take example. Here is Ali who work as a
teacher in Ameeniya School.
Equity in Taxation
• Assumes he earned MVR 6,000 per month and
from that amount each month he take MVR 500 for
clothes.
Equity in Taxation
• But now he has to pay taxes which mean portion of
his income goes to government.
Equity in Taxation
• Now given that Ali has less money in his pocket he
decided to spend less money on clothing. He
decided that he will be spending MVR 250 on
clothing.
Equity in Taxation
• That is the government through taxation can distort
Ali choice to buy clothes.
Equity in Taxation
• But now the government need to decide what
portion of Ali’s income to take so that it can finance
its expenditures.
Approaches of Taxation
• And the government do this using two major
approaches. That is:
• The ability to pay principles
• The benefits principles
The Ability to Pay
• The ability-to-pay theory is one of the main
theories of taxation. According to the theory, taxes
should be based upon the amount of money
people earn.
The Ability to Pay
• For example, those who earn more money are
expected to pay a higher rate of taxes--which
means a higher portion of their income--than
people who earn less money.
The Ability to Pay
• Remember, governments impose taxes to pay for
services, like public schools, roads, police, and
governance.
The Ability to Pay
• Ability to pay principle have two more branched,
that is:
• Horizontal Equity
• Vertical Equity
Horizontal Equity
• Horizontal Equity is achieve when the individual of
same income pay the same amount of taxes.
Horizontal Equity
• For example Dr. Zumra & Dr. Niyaf are both
doctors earns MVR 540,000 pa, and they both
pays 10% of their income as taxes to government.
Vertical Equity
• Vertical equity explain how individuals with
different economic capacity pay different amounts
in taxes.
Vertical Equity
• Lets compare Jumana a working mother with two
children earn MVR 50 per hour with a millionaire
Gasim. According to this approach Gasim who
earn more money needs to pay higher taxes than
Jumana.
The Benefits Principles
• Lets assumes Ali goes to work with his car.
The Benefits Principles
• On the other hand Mariyam goes to office using
public transport.
The Benefits Principles
• Ali will demand from the government to repair and
maintain the road so that he can drive to work.
The Benefits Principles
• The government will respond to Ali’s request by
building and repairing roads and highways.
• But in order to do that he will be put in more higher
taxes such as gasoline.
The Benefits Principles
• That is Ali will enjoy the benefits of better roads but
at the same time he will pay taxes in order to
finance the cost of government to provide better
roads.
Equity in Taxation
• The government through taxes aims to
redistributes the wealth in the society in a more fair
way. Due to that poor people get more happiness
than the rich do.
Tax Avoidance & Tax Evasion
• The terms "tax avoidance" and "tax evasion" are
often used interchangeably, but they are very
different concepts. Basically, tax avoidance is
legal, while tax evasion is not.
Tax Avoidance
• Tax avoidance is the legal act of minimizing one's
taxes.
Tax Avoidance
• Practically every taxpayer engages in tax
avoidance at some point in order to minimize his or
her tax bill. For example, taxpayers who contribute
to Individual Retirement Accounts (IRAs) are
engaging in tax avoidance because those
contributions are deductible and thus lower their
tax bills. Similarly, charitable contributions are tax-
deductible and thus another way that taxpayers
can lower their tax bills.
Tax Evasion
• Tax evasion is the act of illegally avoiding tax
liability.
Tax Evasion
• For example, let's say that Nasir wants to lower his
tax bill. On his Tax Form, he claims a MVR 500
deduction for charitable donation of goods that he
did not actually donate, he neglects to report MVR
6,000 of income he made in cash from giving
piano lessons and he does not report income he
received from an offshore bank account. Nasir is
committing tax evasion.
Tax In Maldives
• "Maldives Inland Revenue Authority (MIRA)" was
established as a separate and independent legal
entity under the Tax Administration Act which was
ratified on 18 March 2010.
GST (Goods and Services Tax)
• Goods and Services Tax (GST) is a tax charged
on the value of goods and services supplied in
the Maldives from 2 October 2011 onwards. GST
is charged under the Goods and Services Tax
Act (Law Number 10/2011).
GST (Goods and Services Tax)
• The Act brings within its scope the current Tourism
Goods and Services Tax (T-GST) regime. It makes
a clear distinction between suppliers of tourism
goods and services and suppliers of other
(general) goods and services.
GST (Goods and Services Tax)
• Registration is compulsory if the value of taxable
supplies of a business exceed MVR 1 million per
annum. However, importers of goods to the
Maldives and suppliers of tourism goods and
services are required to register even if the
value of their supplies do not exceed the MVR 1
million threshold.
GST (Goods and Services Tax)
• The Act imposes a GST at the rate of 3.5% from 2
October 2011 to 31 December 2011 and 6% from
1 January 2012 to 31 December 2012. From 1
January 2013 to 31 October 2014, the GST rate on
tourism sector was at 8%, and tourism sector GST
rate has increased to 12% from 1 November 2014
onwards.
BPT - Business Profit Tax
• BPT is a tax charged, under the Business profit
Tax Act (Act Number 5/2011), on the profits of all
businesses carried out in Maldives. The Act was
published in the Government Gazette on 18
January 2011 and as per the Act, it will commence
after 6 months from this date.
BPT - Business Profit Tax
• Companies, partnerships, individuals and all
persons who are resident or carrying out business
in Maldives would be subject to tax under this Act.
In addition, certain payments made by any
Person to a non-resident would also be subject
to tax under this Act. The tax rates are:
BPT - Business Profit Tax
• Companies, Partnerships and other Persons 15%
• Profit from sources outside Maldives 5%
• Withholding tax 10%
Import Duty
• All cargo imported to Maldives are dutiable, except
items brought by passengers for personal use, in
noncommercial quantities Import duty is levied on
the CIF (Cost + Insurance + Freight) value of the
goods. The rate of duty percentage is listed in the
Import Tariff book.
Spending and Revenue of State
and Local Governments
• In every country, the central government collects
only part of the total national tax revenues and
does only part of the national public spending. The
remainder of taxation and spending is done by
subnational governments, such as state and local
governments in the United States.
Spending and Revenue of State
and Local Governments
• The sources of revenue and the types of spending
done by state and local governments differ
dramatically from those of the U.S. federal
government. On the spending side, the largest
element of state and local spending is education,
followed by health care and public safety; the largest
elements of federal spending are health care, Social
Security, and national defense. The federal
government plays a very small role in financing
education.
Spending and Revenue of State
and Local Governments
• The sources of revenue and the types of spending
done by state and local governments differ
dramatically from those of the U.S. federal
government. On the spending side, the largest
element of state and local spending is education,
Other Types of Taxes
• Taxes on Earnings
• Taxes on Individual Income
• Taxes on Corporate Income
• Taxes on Wealth
Taxes on Earnings
• The first type of taxation is the payroll tax, a tax
levied on the earnings of workers. Payroll taxes
are the primary means of financing social
insurance programs.
Taxes on Individual Income
• The second type of taxation is the individual
income tax, a tax paid by individuals on income
accrued during the year.
Taxes on Corporate Income
• In addition to taxing individual income, many
countries also separately tax the earnings of
corporations through the corporate income tax.
The purpose of the separate taxation of
corporations, above and beyond taxes on
individuals, is to tax earnings of owners of capital
that might otherwise escape taxation by the
individual-based income tax system.
Taxes on Wealth
• Wealth taxes are taxes paid not on income as it is
accrued but on the value of the assets held by a
person or family, such as land, jewelry, artwork,
real estate, and stocks.
Maldives – Summary on sources
of Government Income
• MIRA collected a total of MVR 14.53 Billion in
2016. Compared to 2015, the amount collected by
MIRA increased by 11.3%.
Maldives – Summary on sources
of Government Income
• The largest portion of revenue collected in 2016
can be attributed to GST and BPT. They
accounted for 62.1% of the total revenue collected.
Maldives – Summary on sources
of Government Income
• Other revenue codes that contributed towards a
large portion of revenue shares are Tourism Land
Rent, Land Acquisition and Conversion Fee,
Green Tax, Lease Period Extension Fee, and
Airport Service Charge. These top 6 revenue
codes made up for 86.3% of total revenue
collection.
What else you want to know?
Questions & Answers
Thank You
Ibrahim SameerSeek knowledge from cradle to grave