Department of Accounting and Finance
Public Finance and Taxation Group Assignment
NAME ID NO
1. Yared Eshetu 022/14
2. Alemayehu Deneke 003/14
3. Tamirat Alemu 021/14
4. Ermias Ante 007/14
5. Tadewos Senbeto 020/14
6. Abrham Fenthahun 002/14
7. Faiz Kedir (Add) 046/12
Submitted To Mr. Henok
March, 2017E.C
Ayertena Health and Business College
Department of Accounting and Finance
Public Finance and Taxation Group Assignment
Q1, Explain the scope of public finance?
The scope or subject matter of the public finance is classifies under five broad categories.
Public Revenue
Revenue includes all incomes irrespective of the source they are obtained from. Thus, in the wider
sense, we can include taxes as well as borrowings under public revenue. But in the interest of the
clarity, public revenue includes only those incomes which do not carry with them the obligation of
repayment for the state. Thus, public revenue implies raising income by way of taxation.
B, Public Expenditure
The term “public expenditure” is used to refer the expenditure of government- central, state and local
bodies. It differs from private expenditure in that governments need not pay for themselves or yield a
pecuniary profit. Public expenditure plays the dual role in administration and economic achievement
of a nation.
Public expenditure is the end and aim of the collection of revenues. public expenditure are concerned
with:-
Principles and problems relating to the expenditure of public funds.
The fundamental doctrine that governs the distribution of the expenditure among various heads.
Various effects of public expenditure on total employment, total income, aggregate investment,
output, distribution and general price level etc.
Through public expenditure, the government contributes to the financial flows of the economy and
conditions the demand and supply patterns.
C, Public Debt
It is an income of a capital nature, while the provision for repayment of the capital sum for the year
constitutes expenditure of a capital nature. A public authority can obtain income through loans and
public borrowings.
The study of public debt also includes:
(i) Methods and objectives of public borrowings;
(ii) Management of public debt
D, Financial Administration and Control
Public finance also examine the mechanism by which the above processes are carried on. With out a
study of relevant dimensions of financial administration the subject of public finance remains
incomplete.
Financial administration and control include the following:
(i) Study of budgets and their procedure.
(ii) Budget as a instrument of securing certain objectives, such as promotion of employment,
economic growth with stability, welfare of the weaker sections, infrastructural development for
promoting private investments, etc.
(iii) Financial and physical controls through different fiscal tools for controlling private expenditure in
the economy to avoid the effects inflation deflation, recession etc.
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E, Economic Stability and Growth
The study of public finance includes fiscal policy of the government in dealing with inflationary and
deflationary situations, instability of the price level, promotion of full employment, growth of
economy, welfare of the people, etc.
Public finance may be, therefore, used to secure economic stability or to remove economic
fluctuations in the economy.
Q2, briefly outline the similarities and differences between public finance and
economics?
Similarities
A, Focus on Resource Allocation:-Both public finance and economics focuses on how
resources are allocated.
B, both are engaged in production, exchange, saving and capital accumulation.
C, Scarcity as a common problem:-Both are acknowledging that resources are limited
leading to choices and trade-offs.
D, both are examine how companies and investors evaluate risk and return.
E, both are vital for every country and financial market.
Differences
A, Economics focuses on the broader concept deals about human behavior concerning allocation of
resources. But public finance is narrower it deals with specific strategies and methods of managing
government money.
B, public finance is a branch of economics dealing with management, creation and study of income
and expense of public authority, but economics examines these aspects broadly and theoretically.
Q3, what do you mean by public revenue?
public income or public revenue is the income of the government through all its sources. It includes
income from taxes, prices of goods and services supplied by the public enterprises, revenue from the
administrative activities, such as fees, fines etc., and gifts and grants.
Public revenue is the means for public expenditure. It is very necessary for the govt. to perform its
various functions for the welfare of the society. Increasing activities of the government are the cause
of increasing public expenditure.
According to Dalton, the term “public revenue” has two senses- wide and narrow.
In its wider sense it includes all the incomes or receipts which a public authority may secure during
any period of time.
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In its narrow sense, it includes only those sources of income of the public authority which are
ordinarily known as “revenue resources”.
To avoid ambiguity, thus, the former is termed “public receipt” and the latter “public revenue”.
As such, receipts from public borrowings is mainly excluded from public revenue.
Q4, Define public finance and explain the ways that it differs from private finance.
Public finance is concerned with the use and accomplishment of essential monetary resources of the
government
Public finance is a study of income and expenditure or receipt and payment of government. It deals
the income raised through revenue and expenditure spend on the activities of the community and the
terms„ finance‟is money resource.
It differs from private finance by the following criteria:-
1, Motive; - The motive of private finance is personal interest or benefit, whereas the motive of public
finance is social benefit or public welfare.
2, Adjustment Approach of Income and Expenditure;- Another dissimilarity between the
individual’s private finance and the government’s public finance is that every individual tries as far as
possible to adjust his expenditure to his income because his expenditure depends on his income.
Conversely, the government first prepares its budget. In other words, the government first determines
its expenditure and then devises ways and means to raise the requisite revenue to meet its expenses.
3, Nature of Resources: - The resources (private finance) of an individual are more or less limited,
whereas the resources of the government (public finance) are enormous. Government can raise
resources from tax sources as well as non-tax sources. The government can borrow from internal as
well as external sources.
4, Coercive Methods:- An individual (private finance) cannot use coercive methods to raise his
income, Where as the government (public finance) can use forceful methods to collect revenue. In
other words, to collect revenue, the government imposes taxes at a high rate on the people irrespective
of their capacity to pay. Private individuals or bodies have no such powers.
5, Secrecy of Budget:- Public finance is an open affair as the government gives utmost publicity to its
budget by publishing it in newspapers and by showing it on television, whereas private finance is a
secret affair. An individual tries to keep his accounts secret as he does not want his competitors to
know his real financial position.
6, Long/Short-term Consideration: - Another point of difference between private and public finance
is that the private individuals incur expenditure in those areas of business which give quick returns.
They, as individuals keep in view short-term considerations. On the contrary, government incurs
expenditure keeping in view the long-term considerations, such as construction of dams, multi
purpose hydro-electric projects, etc.
7, Right to Print Currency: - The government has a right to print currency which is legal, whereas
private individual does not enjoy such a right.
8, Elasticity of Finance: - Public finance is elastic in nature-as compared to private finance. Public
finance can be increased by imposing various taxes as public finance is open to drastic changes.
Private finance on the other hand, cannot be increased as there is not much scope for changes in
private finance.
Q5, what are the characteristics of public and private goods?
Public goods also known as collective or social goods are goods that is both non-excludable
(impossible to prevent people from using it) and non-rival in consumption i.e., individuals cannot be
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successfully excluded from its use and the use by one individual does not reduce its availability to
others.
National defense, air, fireworks display, knowledge, street lighting etc are all examples of public
goods.
Characteristics of public goods
A, Non-rival Consumption – Non-rival consumption means the consumption of one individual does
not reduce the benefits derived by all other individuals. It implies that to derive the aggregate demand
of the public good, individual’s demand curve must be added vertically rather than horizontally.
B, Non-excludability – It implies that if the good is provided, one individual cannot deny another
individual’s consumption of the good.
Private goods on the other hand, are both rival in consumption and excludable and use by one
individual reduces its availability for the other individual.
Examples of private goods are apples, loaves of bread, personal car, house etc.
Characteristics of public goods
A, Private goods are rival - one person’s consumption of a good reduces the benefits to the others.
B, Private goods are excludable- one person’s consumption of goods excludes others from enjoying
the benefits.
Q6, what is the very essence of imposing excise tax on goods imported or produced
locally in Ethiopia
Excise duty is a duty levied on commodity produced with in the country for sale or consumption
within the country. The basic essence of excise tax duties are:-
1. Raising revenue for economic growth
2. Discouraging consumption of non-essential goods like luxury goods, alcoholic drinks.
3. Discouraging consumption of certain essential goods
4. Levy of duties where direct taxation is not possible
5. Promotion of small scale industries
6. Provide assistance to industries in distress
7. Encouragement of exports
8. Correcting negative externalities.
Q7, what differentiates excise tax from VAT and TOT?
VAT, TOT and Excise tax are taxes that are categorized under consumption taxes.
Value Added Tax is levied by the Government on the commodities sold at specified percentage on
the value of sales.
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The Turnover Tax would be payable on goods sold and services rendered by persons not registered
for Value Added Tax. A person who sells goods and services has the obligation to collect the
Turnover Tax from the buyer and transfer it to the Tax Authority.
Excise tax is one variety of sales tax like VAT and TOT but unlike VAT and TOT not applicable to
all kinds of goods rather on selected goods like luxury goods and basic goods which are demand
inelastic.
Excise tax is also imposed on selected goods that are hazardous to health and that are a cause of
social problems. In certain goods the tax rate reaches 100% implying that the goods are not
encouraged to be imported or produced locally.
Excise tax is usually levied at the production or import stage, while VAT is levied at each stage of
the supply chain. TOT is levied on sales/turnover.
Excise tax can apply to businesses of all sizes. VAT typically applies to larger businesses that are
registered for VAT, while TOT applies to smaller businesses that are not VAT-registered.
The excise tax is imposed on goods imported or either produced locally in accordance with Excise
Tax Proclamation No.1186/2020.
The base of computation of Excise Tax is the fair value of production for goods produced locally and
goods imported.
Q8, what sources can you think of that will fall under administrative and judicial
sources of Ethiopian tax laws?
The major sources of Ethiopian tax law are legislative, administrative and judicial sources.
Administrative Sources: - These are rules and interpretations issued by tax authorities (primarily
the Ethiopian Revenues and Customs Authority - ERCA) to implement and administer tax laws.
Include:-
Regulations (Directives): These are detailed rules issued by ERCA to clarify the provisions of tax
laws and provide guidance on how they should be applied. These are often very specific and practical.
Circulars: These are communications issued by ERCA to provide guidance to taxpayers and tax
officials on specific issues related to tax law.
Interpretations: ERCA may issue formal interpretations of tax laws in response to specific inquiries
from taxpayers or tax officials.
Tax Rulings: While Ethiopia doesn't have a formal system of private letter rulings like in some
countries, ERCA may provide informal advice to taxpayers on how tax laws apply to their specific
situations.
Administrative Manuals: These internal documents guide tax officials on procedures and best
practices for administering tax laws.
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Judicial Sources: - These are decisions made by courts and tribunals in tax-related cases. Include:-
Federal Supreme Court Decisions: Decisions of the Federal Supreme Court (Cassation Division) set
legal precedent and must be followed by lower courts. These decisions are particularly important in
interpreting tax laws.
Federal High Court Decisions: While not binding precedent, decisions of the Federal High Court
can be persuasive authority and provide guidance on how tax laws should be applied.
Tax Appeal Tribunal Decisions: Ethiopia has a tax appeal tribunal that hears disputes between
taxpayers and ERCA. Decisions of the tribunal can be appealed to the courts.
Q9, Explain the division of revenues under the Constitution of the Federal Democratic
Republic of Ethiopia
Division of Revenues between Central and States
The distribution of revenues between the centre and states is followed on the basis of
"constitution of Ethiopia” and proclamation no.33/1992-proclamation “to define sharing of
revenue between the central government and the national/regional self governments”. The
articles 96, 97, 98, 99 and 100 of the constitution of Ethiopia make a clear demarcation of areas
where the central alone or state alone have authority to impose taxes. It contains a detailed list of
the functions and financial resources of the center and states.
Basis for Revenue Sharing
The sharing of revenue between the central government and the National/ Regional governments
shall take in to consideration the following Principles:
1. Ownership of source of revenue;
2. The national or regional character of the sources of revenue;
3. Convenience of levying and collection of the tax or duty;
4. Population, distribution of wealth and standard of development of each region;
5. Other factors that are basis for integrated and balanced economy.
Categorization of Revenue
According to "Constitution of Ethiopia” and Proclamation No.33/1992-Proclamation, revenues
shall be categorized as Central, Regional and Joint. That is there are three lists given in the
Articles. They are as follows:
A. Central List
The sources of revenue are given under Federal/Central List are as follows:
I). Duties, tax and other charges levied on the importation and exportation of goods;
II). Personal income tax collected from the employees of the central Government and the
International Organizations;
III). Profit tax, Personal income tax and sales tax collected from enterprises owned by the
Central Government. (Now sales tax is replaced with VAT and Turnover taxes).
IV) Taxes collected from National Lotteries and other chance winning prizes;
V). Taxes collected on income from air, train and marine transport activities;
VI). Taxes collected from rent of houses and properties owned by the central Government;
VII) Charges and fees on licenses and services issued or rented by the central Government;
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B. Regional List
The following shall be Revenues for the Regions:
I). Personal income tax collected from the employees of the Regional Government.
II) Rural land use fee.
III) Agricultural income tax collected from farmers not incorporated in an organization.
IV) Profit and sales tax collected individual traders.
V) Tax on income from inland water transportation.
VI) Taxes collected from rent of houses and properties owned by the Regional Governments;
VII) Profit tax, personal income tax and sales tax collected from enterprises owned by the
Regional Government:
C. Joint/Concurrent List
The following shall be Joint revenues of the Central Government and Regional Governments.
I. Profit tax, personal income tax and sales tax collected from enterprises jointly owned by the
central Government and Regional Governments;
II. Profit tax, dividend tax and sales tax collected from Organizations;
III. Profit tax, royalty and rent of land collected from large scale mining, any petroleum and gas;
IV. Forest royalty.
Q10, what are the basic characteristics of taxation?
The basic characteristics of sound taxation are :
Tax is a compulsory contribution: Tax is a compulsory levy by the taxpayers to the
government. The people whom the tax is levied cannot refuse to pay the tax. Once it is levied
they have to pay it. Any refusal in this regard leads to punishments.
Wide Scope: Tax is levied not only on income but also on property and commodities. To enhance the
revenue and to bring all the people under the tax system, the government imposes various kinds of
taxes. This enhances the scope of taxes.
Regular and Periodical Payment: The payment of tax is regular and periodical in nature. It is levied
for a fixed period usually a year. Thus, most of the taxes are levied annually. The payment of taxes
should be also regular.
No Discrimination: Tax is levied on all people without any discrimination of caste, creed etc. but it
should be according to their ability to pay.
Maximum Social Benefit:taxation is the best which is based on the principle of maximum social
advantage.
Common Interest: The amount of tax received from the people is used for the general and common
benefit of the people as a whole. Now the Government has to render enormous range of social
activities, which incur heavy expenditure.
Legal Collection: Tax is the legal collection. It can be levied only by the Government both Central
and State.
Element of Sacrifice: Since the tax is paid without any direct return in benefit, it can be said that
there is the prevalence of sacrifice in the payment of tax.
Wide Scope: Tax is levied not only on income but also on expenditure and capital. To enhance the
revenue and to bring all the people under the tax net, the Government imposes various kinds of taxes.
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