chapter 8 introduction to government finance · principles of taxation • adam smith has given 4...

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