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.
a. 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) A good tax system is one which promotes the economic development as well as focuses on reducing the economic gap between different section of the society. A tax should be implemented in such a way that you can encourage industries to setup their business infrastructure in that area as well as the impact of tax is less on people with low level of income and more on people with higher income. The economic challenges that might arise out of this situation is that the revenue of the government might be negatively affected, when the government is lowering the tax rate to attract industries revenue in the short run may be affected. Another major challenge is implementing different level of taxation for different classes of society. When different tax rates are applied to different income level, people find, especially rich people find a way to avoid the tax by using loopholes in the tax law.

b) The incidence of taxation means that the burden of tax lies on whom and this is important to consider because

· If the incidence of tax is higher on the consumer then the lower income class will be negatively affected and hence basic consumption goods can not be taxed at high rates.

· If the incidence of taxation is on producer then the tax rate has to be such that the supply of goods is not significantly affected.

c) The four major recommendation for the introduction of VAT are:

· Make a clear classification as to what rate is applicable for what goods and services, there should not be confusion on the VAT rate.

· Make sure that it is clear that whose liability it is to calculate VAT and who is supposed to deposit to the government on what date.

· Make sure to have sufficient infrastructure so that it is easy to collect and implement the VAT system.

· Instead of applying on full scale, if possible, apply the system in a small economic zone as to see how is this system being implemented and then go full scale.