CHAPTER ONE
Introduction
The role of the Government in the Economy
Provision of Public Goods
Provision of merit Goods
Market Failure
Redistribution
FORMS OF REVENUE
Sources of revenue
1. Taxes
2. None tax :- Fees and Charges for services
3. Government run enterprises, such as public utilities (water, gas, and electricity)
4. Foreign aids
5. Grants/donations
6. Debt financing
7. Lottery
8. Escheat
Understanding Taxation and Tax revenue
Benjamin Franklin, a known American scholar, once said that in this world nothing is
certain except death and taxes.
What is tax?
They are obligatory (enforced) contributions:-
They are usually payable in the form of money:-
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They should be progressive:- should be progressive, as much as possible, in nature:-
A levy must be exacted under legislative authority
They are paid without any reciprocal service from the government or quid pro quo
PRINCIPLES OF TAXATION
1. Principle of adequacy
Taxes should generate sufficient revenue to fund public service without excessive
borrowing.
2. The Principle of Certainty
Tax payer should know how much, when and how tax must paid
Avoid arbitrary enforcement and corruption.
3. The Principle of Neutrality (Efficiency)
Tax must minimize market distortion Example:- discourage work or investment
Excessive burden (deadweight loss) should be as low as possible.
4. The Principle of Convenience
Taxes should be collected in the manner that is easy and practical for tax payer
Example Income tax pay as you earn
5. The Principle of Equity
Equitability means that taxes must be fair, or just.
Taxes should be based on an individual ability to payment
Equity, or fairness, has two dimensions:
1. Horizontal equity
2. Vertical equity Views that are suggested to justify progression
6. The Principle of Simplicity
Tax law should be easy to understand, collect and comply with
Complex system lead to tax invasion and high compliance cost
7. Principle of transparency
Citizens should know how taxes are used
8. Principle of Flexibility
Economy system should adopt economic change ex. inflation
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Classification and purposes of taxes
Important points
Impact- impact of tax is its first point of contact with the tax payers
Incidence- its final resting place. Incidence of tax is up on those economic units which
finally bear the money burden of it & which are not able to pass it on to others.
Shifting - the person who first bears the legal obligation to pay the tax to the
government may be able to shift the burden to some one else.
Based on who bears the burden
1. Direct taxes
Taxes in which the persons who pay the taxes also bear the ultimate burden.
They are not able to shift the tax burden to others.
Impact and incidence are on the same person.
Example. Income tax
2. Indirect taxes
Are taxes in which the ultimate burden of the tax shifts to other persons or final
consumers
The impact and incidence fall on different persons.
Ex-VAT,TOT
Based on the numerical relationship between a tax base and the
rate applied.
1. A proportional tax systems
The rate of taxation remains constant as the tax base changes.
For instance, if the tax rate is ten percent, and the income of the person is 100,
1,000 and 10,000 birr, his tax liability will be 10, 100 and 1,000 respectively.
2. Progressive Taxation:-
The rate of taxation increases when the tax base increases.
The more you make, the greater percentage you pay.
Progressive taxation is based on the ability-to-pay and corresponding sacrifice.
3. Regressive Taxation
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The rate of taxation decreases as tax base increases.
4. Digressive Taxation
The rate of tax increases with the increase in income up to a certain level and then
becomes constant.
The rate may be slightly progressed up to a certain limit and after that, the
rate will remain constant. This type of taxation is widely accepted in most tax
systems especially for imposing direct taxes.
Based on distribution of tax burden
Multi-stage: The same taxable item under the same tax rate structure is taxed as many
times as it changes hands through production-distribution channels. E.g. VAT, TOT
Single stage: If a tax is imposed at and collected from only one point irrespective of
changes in hands through transactions, it would be a single-stage tax. E.g. sales tax
Based on how they calculated and applied
Specific Tax:- A specific tax is a tax of a fixed amount, imposed by the head or number
or by some other standard of weight or measurement. Per kilo….chat ---5
Ad valorem Tax:- As ad valorem tax is a tax of a fixed proportion of the value of the
property with respect to which the tax is assessed. Car value…..VAT
Function/purpose of taxation/
Revenue generation
Economic regulation(regulatory function)
Examples:- excise tax
Redistribution of wealth (equity function)
Progressive taxation
Social Control
Repricing externalities( corrective function)
Development of Backward Regions and reducing regional imbalance :- Encouraged by
tax examptions
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CHAPTER II
The Ethiopian Tax Law
A Brief Overview
The tax system” is used to denote the nexus between and among tax policies, laws, and
administrations.
Despite all the disorganization, incoherence, and other gaps
Direct Tax
The income tax regime is governed by Proclamation No. 979/2016 and Council of
Ministers Regulation No. 410/2017.
The income tax laws provide for the taxation of thirteen types of incomes in
accordance with five schedules.
1. Schedule A (income from employment),
2. Schedule B (income from the rental of buildings),
3. Schedule C (income from business activities),
4. Schedule D (other income),
5. Schedule E (exempt income).
Income sources that fall outside the five schedules are taxed at 15%.
Indirect tax
Value Added Tax (VAT)
Turnover Tax (TOT),
the Excise tax, and
Stamp duty.
Customs Proclamation
Source of Ethiopian Tax Law
The FDRE constitution
Tax Proclamations, Regulations & Directives
International tax treaties
Regional tax proclamations
Advance rulings
Tax cases are a growing source of tax law.
Other Publications
