Category: Tax

Taxes can influence many people. The future generations need to know how it can relate to other things we do in life. Gen Z tends to work in a world of technology and rely on the things all filled on our phones, social media, and many more. The nation pays taxes day by day, month by month, and even yearly. There are many good facts about the tax environment and this shows much of our society. Learning the essentials of good tax-paying or even what kind of taxes can show many of what is shown today.

Taxes have many things in common in our daily lives. Groups tend not to think about taxes but when people need taxes we tend to understand why we need it and why it is important. Taxes can show us many things in our lives that can change due to the prices that are given or it can depend on the image we see of the taxes.

Federal revenue is around 80 percent of what America runs on (Pruitt). There are many taxes that people use day by day and it leads to why people pay taxes. The government runs on many things but taxes are a big role in American society. This leads to a bigger topic. Do people need to pay for Federal Income, State Income, Payroll sales, Property, corporate income, etc (Barro)? Taxes may depend on the person’s status or someone’s wealth. People in this world run on taxes which can lead to bigger problems. But many products have taxes since the government gets a portion of the “cut”.

The Tax Policy Center had 2015 state and local tax estimates from the Liberal Institute on Taxation and Economic Policy. The chart shows these factors. Almost everyone pays something. Income tax shows what the economy is today. Being progressive is the best way to go from paying something. There is a choice in buying items. There is always more room for improvement in American Taxation. The tax code is unfair these days since the political view of the Republicans and the Democrats are different. President Donald Trump is leading the nation with the opposite intentions from President Barack Obama. The different effects show in many ways. The slogan many people know is this. The Rich get Richer, the Poor get Poorer. People need to understand taxes are a viewpoint that is always changing. There are fairness problems with owners of the capital which can cause problems (Barro).

This problem goes back even from when Abraham Lincoln was the president of the United States. THis was the first-ever tax on personal income to help pay for the Union war. But many states had a stance of being negative. Then the 16th Amendment passes which had pros and cons of paying taxes. The states needed a certain amount of votes to ratify the amendment in 1913, but this was a requirement for federal income tax ever since (Barro). The average income for Americans must file a federal income tax return. It shows how much to pay for taxes. The more you make the higher the tax rate. Many tax rates have fluctuated during the years passed. Recently, President Donald Trump signed the Tax Cuts and Jobs Act, which can change the tax code (Barro). There were several other changes that President Donald Trump changed but it changed many lives in America not drastically but it really hit people with low income.

The Buffett Rule shouldn’t be iterated in this taxes unit and why people pay taxes. People pay taxes for the support of the government to function correctly, without the taxes the U.S. Government income would be much, much lower considering Americans pay every day for small things (Pippenger). President Barack Obama showed the rule that people debate for even today. Understanding taxing millionaires should be mandatory and for them to pay more but Obama showed Americans why the Buffett rule ensured that high-income households pay a minimum percentage (Williams). This is absurd. People with more money should pay more they are blessed with more money to support the American government. Many people don’t understand what people are made of. Money plus Taxes sums up the American lifestyle. This should be hard to be every morning but for many people it is. Working two jobs or even three to support a family is life-changing to see for example watching Bill Gates’s family and seeing the comparisons between what reality is and what fantasy is. This is what people need to be delighted for. Having someone work hard and someone watching them. The Gates family has nothing to lose. This shows what needs to be shown in reality. The Buffett rule shows many people who have low income what it really feels like when People who have more income then you spend more than what they earn. They need to address the difference between the income of a lower-income family and a higher-income taxed family. People know the difference between the people who earn more and what they are earing. They need to address the difference between the income of a lower-income family and a higher-income taxed family. People know the difference between the people who earn more and what they are earning. The only reason that people should and would pay more would have a big benefit on the person working for someone with a much higher income.

Having tax income would be a way of looking for a way to find the bigger picture for certain. Who really pays for the income taxes? The rich? The poor? Who does? As a young kid learning about taxes can have a certain view and a certain way of seeing the taxes and what and how they can affect your learning and what is can show the world. Taxes come in different ways. Income Tax is a big way to track what is coming in and out in what is earned from someone’s worth. It shows the difference between taxation and income taxes that are important to what is belonging to the person.

Society doesn’t judge people based on how much tax they pay or how much taxes is out on someone. But it ultimately comes down to how much you’re paying and why you pay for that certain product. With many taxes going through there are many chances of people complaining. The process isn’t simple. It takes time to understand why taxes are important and sustaining in the U.S. and why it affects America. Many people need to understand that Life isn’t all about the highs and the lows but understand there are responsibilities for taxes, which tie into many things. Taxes are meant to help us learn and grow from what we paid in the past to what people pay to this day.

With countries that have different tax rates, many people can handle several things. One, taxes aren’t huge to pay or to understand but to just pay since it is the law and it has benefits as well as cons. Many people understand that taxes are small but when there are 327 million people who live in the U.S. there is a huge increase in profit and that is a benefit of having government money go up the rocket. With the minimum of taxes, there are other taxes that can grow on you. Whenever you buy something it adds up with the total and the other small shipments that come with the works.

Finally, many humans need to understand Taxes aren’t the worst thing in the world. They symbolize the stamp of being a U.S. citizen and the cost is from living in a country where money is the number one thing running America. America is Capitalist. We run off of what we get from the citizens as well as people who need certain items. As long as the future generation understands what taxes can do and what they form is acceptable for many to come.

Question: 1

The introduction:

Tax liability:

Income tax payable is a type of account in the curreincome and brings within its scope all the taxable income, profits or gains of an assessed which fall outside the scope of any other head. Therefore, when any income, profit or gain does not fall precisely under any of the other specific heads but is chargeable under the provisions of the Act, it would be charged under this head.

Casual Income:

Casual income means income in the nature of winning from lotteries, crossword puzzles, races including horse races, card games and other games of any sort, gambling, betting etc. Such winnings are chargeable to tax at a flat rate of 30% under section 115BB.

Conditions:

• a. No expenditure or allowance can be allowed from such income.
• b. Deduction under Chapter VI-A is not allowable from such income.
• c. Adjustment of unexhausted basic exemption limit is also not permitted against such income.

Any sum of money or value of property received without consideration or for inadequate consideration to be subject to tax in the hands of the recipient [Section 56(2)(x)]

In order to prevent the practice of receiving sum of money or the property without consideration or for inadequate consideration, section 56(2)(x) brings to tax any sum of money or the value of any property received by any person without consideration or the value of any property received for inadequate consideration.

Sum of Money: If any sum of money is received without consideration, and the aggregate value of which exceeds ₹ 50,000, the whole of the aggregate value of such sum is chargeable to tax.

Immovable property:

• I. If an immovable property is received
  • A. Without consideration, the stamp duty value of such property would be taxed as the income of the recipient if it exceeds ₹ 50,000.
  • B. For a consideration, which is less than the stamp duty value of the property by an amount exceeding ₹ 50,000, the difference between the stamp duty value and the consideration shall be chargeable to tax in the hands of the assesse as “Income from other sources”.
• II. Value of property to be considered where the date of agreement is different from date of registration: Taking into consideration the possible time gap between the date of agreement and the date of registration, the stamp duty value may be taken as on the date of agreement instead of the date of registration, if the date of the agreement fixing the amount of consideration for the transfer of the immovable property and the date of registration are not the same, provided whole or part of the consideration has been paid by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system (ECS) through a bank account on or before the date of agreement.
• III. If the stamp duty value of immovable property is disputed by the assessee, the Assessing Officer may refer the valuation of such property to a Valuation Officer. In such a case, the provisions of section 50C and section 155(15) shall, as far as may be, apply for determining the value of such property.

As per section 50C, if such value is less than the stamp duty value, the same would be taken for determining the value of such property, for computation of income under this head in the hands of the buyer.

Movable Property:

If the movable property is received

1. Without consideration, the aggregate fair market value of such property on the date of receipt would be taxed as the income of the recipient, if it exceeds ₹ 50,000.
2. For a consideration which is less than the fair market value of the property by an amount exceeding ₹ 50,000, and the difference between the aggregate fair market value and such consideration exceeds ₹ 50,000, such difference would be taxed as the income of the recipient.

The conclusion:

The Income Tax Act is a comprehensive statute that focuses on the different rules and regulations that govern taxation in the country. It provides for levying, administering, collecting and recovering income tax for the Indian government. It was enacted in 1961.

The Income Tax Act contains a total of 23 chapters and 298 sections according to the official website of the Income Tax Department of India. Income tax in India is a tax you pay to the government based on your income (and profit, in the case of companies). The government uses this tax money for various purposes including public services, infrastructure development, defence spending and subsidies among other options.

Question: 3

The introduction:

TDS:

TDS is basically a part of income tax. It has to be deducted by a person for certain payments made by them. In this article, we will discuss in detail about the TDS provisions under the Income Tax Act.

TDS or Tax Deducted at Source is income tax reduced from the money paid at the time of making specified payments such as rent, commission, professional fees, salary, interest etc. by the persons making such payments.

Usually, the person receiving income is liable to pay income tax. But the government with the help of Tax Deducted at Source provisions makes sure that income tax is deducted in advance from the payments being made by you.

The recipient of income receives the net amount (after reducing TDS). The recipient will add the gross amount to his income and the amount of TDS is adjusted against his final tax liability. The recipient takes credit of the amount already deducted and paid on his behalf.

Any person making specified payments mentioned under the Income Tax Act are required to deduct TDS at the time of making such specified payment. But no TDS has to deducted if the person making the payment is an individual or HUF whose books are not required to be audited.

However, in case of rent payments made by individuals and HUF exceeding Rs 50,000 per month, are required to deduct TDS @ 5% even if the individual or HUF is not liable for a tax audit. Also, such Individuals and HUF liable to deduct TDS @ 5% need not apply for TAN.

Concepts and application:

The applicability of TDS provision:

TDS stands for ‘Tax Deducted at Source’. It was introduced to collect tax at the source from where an individual’s income is generated. The government uses TDS as a tool to collect tax in order to minimise tax evasion by taxing the income (partially or wholly) at the time it is generated rather than at a later date.

TDS is applicable on the various incomes such as salaries, interest received, commission received, dividends etc.

TDS is not applicable to all incomes and persons for all transactions. Different TDS rates have been prescribed by the Income Tax Act for different payments and different categories of recipients. For example, payment of redemption proceeds by a debt mutual fund to a resident individual is not subject to TDS but for a Non-resident Indian is subject to TDS.

TDS works on the concept that every person making specified type of payments to any person shall deduct tax at the rates prescribed in the Income Tax Act at source and deposit the same into the government’s account.

The person who is making the payment is responsible for deducting the tax and depositing the same with government. This person is known as ‘deductor’. On the other hand, the person who receives the payment after the tax deduction is called ‘deductee’. Form26AS is a statement which shows the amount of tax deducted and deposited in a person’s name/PAN in a particular financial year. An individual can, therefore, view/check the TDS from incomes paid to him by viewing this Form 26AS. Each deductor is also duty bound to issue a TDS certificate certifying how much amount is deducted in the deductee’s name and deposited with the government.

The entity making a payment (which is subject to TDS) deducts a certain percentage of the amount paid as tax and pays the balance to the recipient. The recipient also gets a certificate from the deductor stating the amount of TDS. The deductee can claim this TDS amount as tax paid by him (i.e. the deductee) for the financial year in which it is deducted.

The deductor is duty bound to deposit the TDS with the government. Once deposited this amount reflects in the Form 26AS of individual deductees on the TRACES website linked to the income tax department’s e-filing website.

TDS only applicable above a threshold level:

One must remember that TDS on specified transactions is deducted only when the value of payment is above the specified threshold level. No TDS will be deducted if the value does not cross the specified level.

Different threshold levels are specified by the Income Tax department for different payments such as salaries, interest received etc. For example, there will be no TDS on the total interest received on FD/FDs from a single bank if it is less than Rs 40,000 in a year from that bank. For senior citizens, TDS on interest received on FD will be applicable if it crosses Rs 50,000 in a single financial year. Tax Deducted at Source (TDS) was introduced by the government to crack down on the tax evaders. TDS is basically collecting tax at source. TDS can also be considered a prepayment of tax. As per the TDS concept, if the payment exceeds a defined threshold, then a company or a person making the payment (deductor) must deduct tax while making a payment. The deductor must then deposit the tax deducted into the account of the central government on behalf of the recipient of income.

Correct Answer & Interpretation:

A. Explain and examine the applicability of TDS provision:

As per section 192 of income tax act 1961 tax is required to be deducted on payment of income chargeable under the head income form salaries.

In computation of total income employer may consider loss form house property of employee if employee furnished first detail to employer.

B. Compute total tax liability and monthly deduction for TDS:

Computation of total tax liability

Particulars Amount

Income from salary head 750000

Less: Set off losses from house property

1. Let out house property (360000)
2. Self occoupied property (200000) Total : 560000
3. Subject to maximum : 200000 (200000)

Total income 550000

Add: income from Fixed deposit 150000

Total income 700000

Tax liability

Not tax up to 300000

Tax @ 5 % (500000 – 300000) 10000

Tax @ 20% (700000 – 500000) 40000

50000

Add: Health and education cess 2000

Total tax liability 52000

Computation of monthly Tax deduction at source under section 192: 52000 / 12 = 4333.33 per month

Introduction

According to WHO, the four major non-communicable diseases (NCDs) in the world include of cardiovascular diseases, diabetes, cancer and chronic respiratory diseases. Poor diet and obesity are most common preventable risk factor for the occurrence of the NCDs. Globally 40 million deaths occur due to it. While in Australia 90% of the deaths occur due to NCDs [1] In 2015, 19.7% of the deaths and 9.5% DALYs occurred due to NCDs caused by poor diet. [2] According to the Australian Bureau of Statistics, “6 million people suffer from hypertension, 1.7 million have signs for chronic kidney disease, 1 million suffer from diabetes and 600000 Australians have cardiovascular diseases”. [3] Due to increased consumption of the unhealthy food and beverages, the risk of obesity and NCDs are continuously rising. [4] In 2017, 63.4 % of the adult and 27.4% of the children were obese in Australia.[5]

The economic cost associated with NCDs is around $27 billion in Australia which is about 36% of the health expenditure due to all diseases. About $8.6 million is due to poor diet-related NCDs. [6] As the poor diet has larger contribution for the NCDs worldwide, this report summarises about how the food tax have been implemented in different part of the world and its cost-effective measure to control NCDs. The information for this report is collected from peer-reviewed journals and articles by database search like Medline, government data and websites from the internet and advanced google search and books from Monash library.

Risk factors for the NCDs

The major risk factors contributing to NCDs includes of: Poor Diet, alcohol, smoking and reduced physical activity.

1). Poor diet

About 7.2-7.9% of the NCDs occur due to it. [7] In the recent era of fast food, the consumption of high-density food rich in saturated fats, sugar, salt and calorie give rise to obesity and overweight. Childhood obesity is major public health concern these days leading to varieties of the chronic illness like cancer, cardiovascular diseases, obstructive sleep apnea and diabetes.[7] Various environmental and behavioural factors play important role in the development of the obesity. Reduced activity, increase in the social media and television usage, parental factors and negative impact by food advertising are identify risk factors for obesity. [8]

2). Smoking and alcohol

They contribute around 7-7.2% for the development of NCDs [7]. Environmental factors like family gatherings, clubbing, peer support, mental stress, depression and other mental imbalance can influence people to smoke and drinks. Various strategies like tobacco tax, health warning signs, plain packaging, sales tax on alcohol beverages and ban on the public smoking have significantly impact on the reduction of smoking and alcohol consumption, but still target is yet to achieve. [9]

3). Reduced physical activity and high BMI

1.2 to 5.5% of the NCDs occur due to it. [7] Excessive use of social media, increase workload, more time spent in front of the TV have substantially reduced physical activity among people mainly children. Most of the children having both working parents and the bicycle drive to school have been reduced these days. Also, most of the food is fed in front of the television which increase the consumption of Unhealthy and high-density food.[10]

Who are at risk?

Poor diet-related NCDs are not evenly distributed. Various studies have reported that the people with lower education, lower income, low socioeconomic group people, people who are already obese or suffer from chronic illness are at higher risk for the NCDs [11] In Australia, Aboriginal and Torres strait Islanders have double chances for the development of diabetes, cardiovascular diseases and increased cholesterol level with higher risk of mortality compared to the non-indigenous population.[12]

Strategies

The epidemic of the NCDs occurs globally due to the alcohol, smoking and unhealthy diet consumption. As a result, it increases productivity and health care expenditures. Numerous strategies have been adopted worldwide, but the excise tax on this product have proven to be more cost-effective and reduce the overall consumption of these products.[13]

The economic cost associated with smoking is more than $1.4 trillion globally, while for alcohol it is 2.5% of total GDP and for obesity-related diabetes it is $670 billion.[14]

Smoking Tax

Globally the excise tax was introduced on tobacco products mainly on those manufactured products. Based on various studies conducted in High income countries reported that 10% increase in the price of tobacco, reduced consumption by 4%, while in lower to middle countries it was about 0.5%.[14] Thus, many studies showed that price increase significantly lowers mortality and morbidity. However, the impact was more profound among the youth and people from lower socioeconomic groups.[15]

In 2016, the Australian government introduced the increase in the tobacco tax by 12.5% and increased the cost of the cigarette packets by 40$ by 2020. Tobacco Tax has a significant impact on the behavior of the people and have significantly reduced the smoking incidence. [13]

Alcohol Tax

Various studies conducted in high-income countries found that increasing the price of alcoholic beverages to a significant amount can reduce the binge drinking, road traffic accident due to heavy drinking, chronic liver diseases caused by excessive drinking, cancer prevalence and many chronic illnesses can be reduced.[16]

In High-income countries the demand of alcohol reduced by 0.51 and 0.77 due to increased price while in lower-income countries it is about 0.64[16]

Food Tax

Excise tax on any items increase the price of the products and reduced the demand among the people. The food tax has been introduced since 1980s in various countries. Food taxes are implemented mainly on the sugar, salt, sugar-sweetened beverages (SSBs) and saturated fat products. Out of all the tax, sugar tax and SSBs has achieved maximum gains and impact the health benefits.[17]

The fig 1 shows the impact of the tax on the sugary beverages and its influence on the behaviour of the people, ultimately reducing the risk of overweight and obesity and NCDs.[18]

FIG 1: SSBs tax and its outcomes

Food tax across the global.

According to Cabrera Escobar and others, stated that over 26 countries in the world have been successful in implementing the excise tax on the SSBs and other unhealthy food items. [17]

Denmark was the first country who proposed the tax on the soft drinks in 1930, which was again reformed in 2014. Norway also imposed the taxes on the sugary beverages in 90s. Later, Hungary and France also implemented the taxes on the SSBs in 2011 and 2012 respectively.[19]

Mexico, became the first state in US to impose a tax on SSBs as well as on unhealthy food in 2014. One peso per litre was introduced which increase the price of the beverages by 10% and also 8% increase in the price of unhealthy food. [20] In 2015, the city of Berkeley in California implemented the tax on the SSBs by $0.01 USD, which influenced other states in the US to adopted the taxation on the SSBs.[21] Denmark and Hungary have recently introduced the tax even on the meat and dairy products with high saturated fat content.[22]

In 2016, Australian Government also imposed 20% of the tax on the sugary beverages.[23]

Effect Of The Food Tax On NCDS And Who Is Most Influenced?

In Mexico, the excise tax on the non-alcoholic beverages by 10% reduced its consumption by 9.7%, while in California it was reduced by 21%. The reduced consumption reduced the incidence of the obesity and NCDs. [20,21]

In Australia, 20% of the SSBs tax reduced the demand of it by 12.6% among the individuals. The prevalence of the obesity was reduced by 2.7% in men and 1.2% in women. [23]

FIG 2: Number of the cases reduced by the SSBs tax in Australia.

Fig 2 shows the that around 600 diabetic cases, 250 IHD and 70 Stroke cases were reduced after the implementation of the SSBs within two years. The net DALY gained due to the food tax in Australia is 470000. [23] In India, one of the studies found that SSBs taxes reduced the consumption of SSBs and the substitutes where purchases like water and milk.[24]

Thus, the food tax does influence the behaviour of the individuals toward the less consumption of the unhealthy food and beverages. However, many studies have stated that the many people due to price rise shift to other substitute with less price or other unhealthy products. As the price elasticity varies in the different parts of the world, the net impact of the food tax is less if it imposed only on particular products.

The impact of the food tax was higher among the lower socioeconomic groups. Higher group were less significantly affected due to price rise.[25] One of the Mexico study found that the food tax helped to developed healthy eating habits among the LES group people and as they are more prone to NCDs help to reduce the burden of obesity and NCDs. [20]

Economic Impact Of The Food Tax.

NCDs related to poor diet accounts for $5.3billions for the health expenditure in Australia in 2015. After food tax the net saving on the direct health cost was around $3.4billion in Australia. [26]

Food taxes have lots of other economic impact other than health cost. The food tax can affect the government revenues. The amount of the tax collected from the food and SSBs can be utilised for the other public health control strategies. For example, in Mexico the increased in the tax by 10% doubled the rate of the SSBs which reduced the consumption by 12%, but the remaining 88% tax will still be collected and can increase the revenue by 76%.[27]

The food tax can affect the food manufacturers by reducing the sale of their product and leading to economic loss. This can affect the employment of the employees in the company due to recession. This can be a trouble for the government as many food companies can oppose the food tax. But the government can employ this worker for the newer strategies implemented by them from the revenues collected from the food tax.[28]

Also, the most vulnerable group to be influenced by the food tax is the poor people and lower SE group. Due to food tax, the price of the food product increase which reduce the purchase among the LES group people. However, studies have found that the consumption of the unhealthy food and the prevalence of the NCDs was higher among them. Thus, food tax can significantly affect the health benefits among them. [28]

Though lot of the studies have been conducted on the food tax and its economic impact on the health system and health costs, but still lots need to been done to understand the impact of the taxes on the productivity and net benefits.

Action plan for the food taxes.

The program logic model designed below helps to government at national and state level to identify the resources and activities needed for the proper implementation of the food taxes.

Aim: To reduce the consumption of the unhealthy food products and beverages among the individuals by introduction of the food tax.

Objectives:

To develop the plan for implementation of the food tax at national as well as state level with the available resources and reduce the consumption of poor diet and prevalence of the NCDs in the country.

Further recommendations:

The burden of the NCDs and the obesity are raising continuously. Price is the main factor contributing to the purchase of the unhealthy food. Varieties of the taxes are been imposed on the food products like sale tax, tax on production, custom duties and excise taxes.

My Further recommendation for the food tax based on evidence are: [28,29]

1. Excise tax should be used as they have higher impact on the health benefits.
2. The excise tax should be such that there is not much difference among different brands hence the people doesn’t have much options left to chose from the cheaper brands and reduced the consumption’s
3. Tax should be imposed in such a way that food manufactured can not alter the price for better revenues.
4. Regular review and health impact should be monitored, if necessary, it should be increased for better health outcome benefits
5. The tax should be based on the ingredients rather than quantity and volume of the food products.
6. The food tax mainly affects the poor people; hence it should be taken care that they can afford the healthy food. Like in Australia the subsidies are introduced for the fruit and vegetables along with the food tax on the sugar, salt and high-density food, which switch the people to healthy buying options.
7. The increase price due to the tax can warn the people about its dangerous effect on the health, can help in the behavioural change and healthy dietary adaptations.
8. Significant increase in the price is required on certain items which are highly consumed and multiple products should be considered to left the people with no options to consume other than healthy stuff.
9. Large revenues can be collected from the tax which can be used for the various public health program for the better health outcomes.

Political influence

The strong government support is needed for the successful implementation of the food tax in the country. Many factors do influence the tax avoidance inside the government like the public disappointment with the increase tax, pressure from the food companies to avoid the tax and reduced gain of the revenues from the food products.

However, many studies have shown that food tax can significantly impact the health benefit related to obesity and NCDs. Thus, by strong support of the government and regulation for the administration of the tax, we can strongly implement the food tax and reduce the burden of the diseases related to it.[30]

Conclusion

The food tax can target the specific products which are unhealthy and can adversely affect the health outcome of the individuals. The excise tax can reduce the consumption of the unhealthy product and can reduced the prevalence of the obesity and number of the NCDs. However, this is not possible without strong political will and public support. Strict regulation and penalties need to be taken into action for proper implementation of the tax. Food tax along with the alcohol and smoking tax can significantly lower the NCDs throughout the world and also the health expenditure can be significantly reduced.

Taxes are generally perceived as a burden by most ordinary citizens and legislators however it is through taxation that the government can raise revenue to fund provision of many public goods and services and distributing wealth. “Taxes are what we pay for a civilised society”, wrote Oliver Wendell Holmes. Broadly, the purposes of taxation are vast including funding for physical infrastructure such as rail and other transport systems, funding for social protection i.e. unemployment & disability protection. Tax is thus justified by the benefits it offers to society. If such benefits are not provided to society, the reason for collecting taxes is lost. There are 3 main bases of taxation: income, capital, and expenditure. With a focus on personal income tax, the purpose of this essay is to explore the challenges that may arise in designing an effective personal income system. While most countries, (particularly developing countries) rely on all the 3 bases, developed countries tend to shift focus mainly on income tax in generating revenue.

How do we identify a good tax system? A good and effective tax system should be designed for equity, efficiency, convenience, and certainty according to Adam Smith’s ‘Canons of Taxation’. Smith outlines his 4 main principles that establish a proper tax system (ifs.org.uk):

• The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities
• The tax which the individual is bound to pay ought to be certain and not arbitrary …
• Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.
• Every tax ought to be so contrived as to take out and keep out of the pockets as little as possible, over and above that which it brings into the public treasury of the state.

Additionally, when designing a good income tax system there are other factors that also need to be considered such as tax structure, tax rates, tax burdens, taxpayers’ behaviour, and economic welfare. Most developed countries rely on income taxes as their main source of revenue, so it is crucial to consider such factors. When designing a tax system, policy makers need to take into consideration how taxes affect the distribution of income and how the tax burden will be shared between tax individuals with different incomes. This helps to establish if a tax will be proportional, progressive, or regressive. A proportional structure is one where individuals pay the same tax rate on their income regardless of what they earn. A progressive structure is where those with low incomes pay a lower tax rate than high-income earners. This structure is typical of income tax. A progressive structure is thus seen as one that reduces inequality in income distribution. With a regressive structure, low-income earners pay a higher percentage of taxes than higher income earners. Every country has its own way of manging their tax systems and there are many aspects to look at when reviewing what an effective income system needs; having to examine what is fair and what is feasible, and this can be challenging for policy makers.

Understanding the importance of fairness

Before we delve into the challenges faced when designing a good personal income tax system, it is vital that we understand the importance of fairness in tax. One of the principles Adam Smith points out is that ‘the subject of every state ought to contribute towards the support of the government, as nearly as positive in proportion to their respective abilities…”. He stresses that proportionality should exist with taxes in line with the level and sources of income. Chrestensen (1994) carried out a research titled “The impact of education on the perception of tax fairness” and identified different dimensions of tax fairness: fairness of the tax system, fairness of personal payment level, exchange with the government, tax rate structure, and fairness of special provisions. (Journal of economic sciences)

The importance of fairness rests in how just the system is. Tax burdens should fall on individuals fairly considering their socioeconomic status and their ability to pay. Ability-to-pay principle requires that taxpayers be taxed according to their scope to bear the tax burden. A necessary condition when it comes to equity in tax, is an equal treatment of taxpayers with equal circumstances. This is known as horizontal equity where those with similar income pay the same amount of taxes. This ensures no discrimination considering race, gender etc. In contrast, vertical equity requires tax burdens vary in proportion to income. This implies that those with higher incomes should pay more taxes since people differ in a way that some individuals have different circumstances. It is often accented that the “wealthy” should not have to suffer tax burdens since they have earned their money, but a good tax system should appreciate every worker.

It is also important to understand fairness from taxpayers’ point of view which tends to be shaped by what the government is doing right for them. Is the government providing essential services to their citizens? If so, are the citizens satisfied with how their taxes are utilised? Kirchler (1997) conducted a study on how Australian taxpayers argued that government needs to focus their public spending more on education and health, as well as research and preserving their culture. Similarly, Brazilians have argued for implementation of policies to focus tax spending more on health education and poverty. Andrews (2003) expressed how governments should view society as customers and establish trust and a satisfactory relationship with their “customers”.

Complexity and costs

What makes personal income tax complex? Despite many calls for simplification, the income tax system remains to be significantly complex. Much of its complexity exists from a legal basis though issues may arise in several forms. Prebble (1994) points out that tax legislation is more complex than it needs to be (James and Nobes 2015/16) and that this is due to trying to fit the law around the “natural facts of economic life” thus resulting in the law itself being complex. Complex laws might affect tax individuals’ willingness to comply with the tax system, especially with a system of self-assessment. An overly complex system may also make it difficult for government to estimate future revenues and costs thus implementing economic strategies will be more difficult to do.

There are also complications when defining ‘income’ and deciding the chargeable income and defining capital gains, business income etc. Defining a tax base is just as important as determining what tax rates to implement. When trying to decide what constitutes as income and what to tax, legislation must look at: what is income, whose income it is, the kind of income & when is it income. (William Vickrey, ‘Tax Simplification Through Cumulative Averaging), which leads to reviews over what defines Income, Capital gains etc. More importantly, as a result of its complexity, the tax system incurs great costs that arise from many reasons including trying to simplify the system e.g. costs that are incurred due to trying to make the tax base display tax individuals’ ability to pay. Administrative costs are costs to the government incurred throughout the process of collecting taxes. These include data collection costs, record collecting costs, liaising with tax authorities, filing returns, and dealing with enquiries. Compliance costs, or the “hidden costs of taxation”, are costs incurred mainly by taxpayers’ due to their behaviour. A taxpayer may choose to pay or reduce their tax liability. This is the distinction between tax avoidance and evasion. Tax avoidance is legal manipulation to reduce amount of tax to pay whereas evasion is the illegal practice of avoiding paying tax. Both constitute as non-compliance and can have great implications on the government. If it is realized that tax individuals benefit from such non-compliance it may reduce ‘tax morale’ collectively and in turn reduce compliance which means more costs incurred through more enforcement activities. For a tax system to be effective, it is vital that most tax individuals comply however there are many reasons why taxpayers may fail to comply, and the government need to question how best to tackle this. Government needs to realize that enforcement activities such as fines, number of tax rates is not the sole strategy to improve compliance and could possibly increase tax complexity instead.

Influence of inflation

The effect of inflation on the income tax system has not received much attention since the worldwide decline of inflation rates in the 1980s. In an income tax system, inflation can distort tax base and the tax structure. With a progressive tax structure, high income earners are subject to higher tax rates and with inflation, they are again subjected to increasing tax rates. To compensate for inflation, this means more adjustments by tax authorities and self-assessments. High inflation rates leads to tax authorities increasing tax rates by increasing the prices on goods and services which will affect household income and spending. Mahdavi (2008), reported findings on how inflation is one of the major factors that influences a country’s tax policies. Understanding how such a determining factor can affect some elements of tax revenue is important for tax authorities in designing an effective tax system that will not significantly affect taxpayers’ savings and choices. Qadir Patoli et al. (2012) conducted a study on the impact of inflation on taxation in Pakistan and established that inflation has a positive correlation with taxation. Changes in inflation rates could affect tax rates and consequently affect tax morale resulting to evasion or avoidance. Increase in tax rates caused by inflation when rules are not adjusted will largely affect low-income earners more than high-income earners which again raises a question of equity when designing an income tax system.

Conclusion

Most countries face significant fiscal challenges. A good and effective income tax system should not only be about yielding revenue but should also incorporate a fair tax environment by considering the ability to pay and encouraging low compliance costs. The notion of fairness though not simple to define, in respect of law should be about locating the tax burden enough to leave taxpayers with enough income for their day-to-day activities. In designing an income tax system, for many developing countries, the focus is how they can increase revenue rather than a question of “if they should”. The only possible way to increase revenue is to increase tax rates and improve their tax administration but this is easier said than done. Increasing tax rates could increase inequity since those who cannot bear the burden may choose to flee from it. Imposing taxes has great economic costs well past the costs of revenue collection. Taxation also has effects on behaviour which consequently will affect people’s decisions about their work pattern, how much savings they acquire and how much they can consume, and this can thus be a disincentive to work effort. Additionally, compliance costs of tax as well as public administration costs must be considered. In designing a personal tax system, the government will hence face such challenges and therefore need to find some balance between how they raise revenue, equity, efficiency and lowering the economic costs of taxation, which can be difficult.

Executive summary

This study will focus on investigating and identifying the relationship between strategies and property tax collection in Tanzania. Specifically, it aims at examining the strategies for the improvement of property tax collection in government, identifying the major challenges confronting property tax collection, and suggests possible measures to overcome those challenges to increase revenue collection from the property owners. The study intends to involve 120 respondents from 4 wards of Ngaramtoni Township Authority at TRA-Arumeru in Arusha, Tanzania. The study anticipates gathering both primary and secondary data that will enable a pile-up of the findings. The researcher will gather primary data through questionnaires, interviews, and spot observation, and secondary data from books and various documents. Scientific Package for Social Science (SPSS) Version 25 software will be used on data analysis. Hence, the study will help government efforts on revenue collection to meet public services demand.

Introduction

This study will focus on assessing the Strategies towards Improvement of Property Tax Collection. The study will be a descriptive survey design to find out better strategies for revenue collection on property tax.

Background of the Study

In Africa, meeting demand for public services is a great challenge, so governments must raise funds to meet social services (Kironde, 2000). Property tax has a potential effect on public finance in developing countries (Aluko, 2005). It’s a vital ingredient of fiscal policy for governments and is a source of revenue in most countries (Bahl, 2007).

In Tanzania, property tax was initially been collected by LGAs before shifted to the central government where currently TRA is collecting its revenue since the government’s financial year 2017/2018. The government’s decision for property tax to be collected by TRA was due to cities, municipalities, and district councils performing poorly in property tax collection but still TRA is not performing well in property tax collection.

From the above argument, the researcher sees poor property tax collection is a result of a lack of appropriate strategies for property tax collection by authorities. He believes this is a problem that facing Tanzania government and other developing countries’ governments, so he will conduct a study on strategies for improving property tax collection to help the government collect maximum revenue from property tax. Property tax is a vital area of taxation that promising huge revenue to the government (Vlassenko (2001)).

Statement of the problem

The current government efforts on raising economic development via industrial transformation demand financial resources to implement its community projects. Property tax is vital areas of taxation that will contribute significant revenue in implementing government services, example about 29.9% of government services payment comes from property tax by Youngman (2005) in the U.S.A study. But due to challenges, it cannot be easy to achieve maximum property tax collection especially in developing countries (Kelly R. & Montes M. (2001)). There no appropriate strategies to overcome the loss of revenue from property tax in government authority. So researcher on this study will focus on finding out appropriate strategies for improvement of property tax collection in Tanzania because currently, property tax contributes very low revenue compared to other sources of revenue while it seems as it can contribute huge revenue.

The objective of the study

This study aims at assessing strategies for the improvement of property tax collection in Tanzania. This will be complemented by three specific objectives namely under:

• To examine strategies for improving property tax collection,
• To identify major challenges confronting Property Tax Collection; and
• Suggesting ways that could help increase property tax collection.

Significance of the Study

Property tax is among the government levies promising revenue collection in Tanzania. This is because it involves residents whose own properties are required by law to pay tax on each property they own either for residential or commercial. This study will create awareness within the government on ways of increasing revenue collection on property tax.

However, the study will make a scholarly contribution by acting a reference to other scholars who may have an interest in studying the relation of property tax and economic development.

Literature review on Property Tax

In a study conducted by (Bird, and Slack, 2002), Property taxes appear to be inconsequential revenue sources when compared with other sources of revenue contributing to the country’s GDP. For example, in developed countries, the property tax was a bit more than 1% of GDP as compared to other taxes about 4%. Also, Kayuza’s (2006) study conducted in Tanzania revealed that property tax generates very low revenue due to insufficient database on valued properties and resistance on paying tax bill by property taxpayer, this leads to not meet project revenue budget on property tax by the government.

In a study conducted by Franzsen (2001) in Australia on the impact of property tax to the economy revealed property tax in developing counties are relay excluded on local authorities own source revenue, contrary to rich countries that including it, an example property tax to GDP ratio recorded in Canada 4.1%, US 2.9% and Australia 2.5%.

Kelly R. & Montes M. (2001) in their study in Malawi, sports that developing countries tend to collect significantly less property tax revenue. For example; Fjeldstad (2004), revealed that about 20% of the citizen in Tanzania whose are property owners are liable to pay property tax while the rest undervalued not paying property tax lead to revenue loss in property tax. The problem with this study considers all the challenges with no strategies to overcome the loss of revenue in property tax and is based on the tax collection system leaving taxpayers.

Smoka and Cesare (2006) sports that unknown tenure rights due to informal buildings and much slums in cities and municipalities cause it difficult to identify the taxable property and corresponding taxpayers on the determination of property values in a market. Properties should be revalued in five years interval to capture the correct market value due to some renovation made on such property, long term with no valuation lead to low revenue collection from the source due to unrealistic data (Kitillya, 2011).

Property tax antiquity from Tanzania was levied on hut and houses during the colonial era. Local Government Finance Act of 1982 and the Urban Authorities Rating Act of 1983 give power to cities and municipals to collect taxes including property tax. Problems encountered on property tax collection are lack of effective statutory rates, inconsistency in valuation /assessment of properties, and insufficient records (kelly & Musunu, 2000).

James & Nobes (2000) revealed that the framework benchmark for various tax system proposals should be put into consideration and used as a checklist for important aspects that ought to be included.

Walker (1970) points out that put clear in people’s minds the benefits from the government on taxes; it will raise the willingness of them to pay taxes. Therefore, the tax burden should be linked to the taxpayer’s level of economic wellbeing (Slemrod & Bakija, 2001).

Research Methodology

Since the study will be centered on studying the relationship between the variables, a descriptive design will be employed. It will also base on both quantitative and qualitative research approach through a case study strategy. The rationale behind the research design and approaches selected is the nature of the problem. Purposive and simple random sampling will be used to get the sample from the targeted population. The study will deploy a survey questionnaire comprise both, closed and open-ended, which focuses on property tax in which participants will respond to it in the study. Furthermore, the spot observation and in-depth interview will be applied to supplement the data which will be collected through the mentioned data sources.

Conclusion

The government revenue comprises property tax, service levy, income tax, corporate tax, value-added tax, sales tax, crop produce cess, land rent, business licenses e.t.c. Consequently, the improvement of property tax collection will lead to an increase in government revenue hence the implementation of community projects.

REFERENCE

1. Aluko, B.T. (2005). „Building Urban Local Governance Fiscal Autonomy through Property Taxation Financing Option‟. International Journal of Strategic Property Management 9: 201-214
2. Bahl, R.W (2007). “The Property Tax in Developing Countries,” Working Paper, Lincoln Institute of Land Policy, July.
3. Bird, Richard M., and E. Slack. (2002). International Handbook on Land and Property Tax, Edward Elgar Publishing Inc, Cheltenham, United Kingdom.
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