Question

1. Explain two (2) major reasons why the incidence of taxation should be of paramount importance to the

Government.

2. Discuss four (4) major recommendations you would offer a neigbouring country that is in the process of

introducing VAT in their country.

Answer 1

Answer: Incidence of taxation- It means final tax placing. Tax is not only by the people who pays it, in fact it shifts from one person to another. Incidence is on the person who bears the burden of tax. It is also a division of taxation between buyers and sellers. Incidence is on the consumer.

Reasons of importance of tax incidence to Government-

1. Tax incidence helps in making Fiscal and tax policies, Government decides tax slabs and tax rates, the amount of total tax and on whom that tax should be levied. Tax incidence makes Government able to make fiscal budget.
2. Tax incidence and economy are related, The elasticity of demand of goods help understand the tax incidence among the parties and stakeholders such as buyers and sellers. When supply is more elastic than demand, the tax burden falls on buyer, if demand is more elastic than supply, the tax burden falls on producer. This helps Government in determining the amount of tax.