Question

Assume you are a fresh graduate from UPSA with Public Finance as one of your specializations. You have been
employed by the Ministry of Finance in your country. The government of your country is in the process of
designing a better tax system in order to maximize revenue for accelerated economic development.
Your superior has assigned you the task of assisting in designing the new tax system. Discuss what a good
tax system would require and explain the specific economic challenges that affect taxation in your country.

b. Explain two (2) major reasons why the incidence of taxation should be of paramount importance to the
Government.
c. Discuss four (4) major recommendations you would offer a neigbouring country that is in the process of
introducing VAT in their country.

Answer 1

a) In order to be a tax system to be good and effective it needs to meet five basic conditions. These are:

• Adequacy: A tax system should be such that it provides enough revenue to the government so that it can provide basic needs of the society. It should be able to generate revenue that is enough to meet the demand for public services.
• Fairness: A good tax system is one that is fair. It means that it should be designed in a way that everyone pays a fair share of taxes.
• Transparency: A tax system should be transparent so that the taxpayers and leaders can find information easily regarding the tax system and hoe the money collected from tax are used. A transparent tax system ensure that people know who are being taxed and how much they are paying and how this money is used.
• Administrative ease:A tax system should be easy and should not be costly for the tax payers. Rules should be simple and non complicated. The forms that are used for tax purpose should ot be complicated and state should e able to tell that whether taxes are paid on time and correctly.
• Simplicity:A good tax system is one that is simple. It should help taxpayers to understand the system in a better way. Further the compliance cost should also be less.

There are specific economic challenges that affects taxation in a country. An economy that is based heavily on the taxes are under great pressure. Reforms needs to be made that makes the taxes high. Many unwanted changes are made in tax system due to the economic challenges that are in present in a country.

b) Incidence of taxation is division of tax burden between the buyers and the sellers. Reasons why the incidence of taxation should be of paramount importance to the government are:

• One of the reason that makes taxation to be of paramount important to the government is that taxes generates revenues for the government. As we know that it is possible that the person wo pays the tax first is the person who bears it. The burden of tax may have been shifted to other person. Thus, Studying incidence of tax helps government to track the person who ultimately bears the tax.
• Another reason is that tax system aims to raise revenue from the section who can bear tax in the best way.

c) VAT is value added tax. It is calculated incrementally. This tax is levied on every level i.e production, distribution, sales made to the end customers. The neighboring country that is in the process of introducing VAT should consider the following:

• VAT should be made accounts based or invoice based. Under the invoice method VAT is charged on the output
• Timing of collection should be made either on accrual based or cash based. Under cash based accounting Revenues are recorded on the day on which the funds are received. Under accrual based system revenues are recorded on the day on which transaction takes place.
• Registration for VAT should be made compulsory. Regulations required for registration should be made simple and clear.
• A flat rate of tax should be levied.