ADDIS ABABA UNIVERSITY

PUBLIC FINANCE AND TAXATION

CHAPTER TWO
 Meaning and Characteristics of Taxation

• “In this world, nothing is certain but death and taxes” -Benjamin
Franklin
• In every country major part of the revenue is raised through taxation.
• According to Prof. Taylor “Taxes are compulsory payments to gov­
ernments without expectations of direct return or benefit to the tax
payer”
• Taxes are payments people are required to pay to local, state and national
governments.
• Taxes are used to pay for services provided by government:
• Schools
• Police
• Defense
• Etc.
 Objectives of taxation
1) Raising Revenue
2) Regulation of Consumption and Production
3) Encouraging Domestic Industries
4) Stimulating Investment
5) Reducing Income Inequalities
6) Promoting Economic Growth
7) Development of Backward Regions
8) Ensuring Price Stability
 Principles of taxation
In this sense, his canons of taxation are ‘classical’ in sense, four canons of taxation
are:
(i) Canon of equality or equity
(ii) Canon of certainty
(iii) Canon of economy
(iv) Canon of convenience.
• Modern economists have added more in the list of canons of taxation, these are:
(v) Canon of productivity
(vi) Canon of elasticity
(vii) Canon of simplicity
(viii) Canon of diversity.
 Canon of Equality
• Canon of equality states that the burden of taxation must be distributed equally
or equitably among the taxpayers. However, this sort of equality robs of justice
because not all taxpayers have the same ability to pay taxes.
• Rich people are capable of paying more taxes than poor people. Thus, justice
demands that a person having greater ability to pay must pay large taxes
• If everyone is asked to pay taxes according to his ability, then sacrifices of all
taxpayers become equal. This is the essence of canon of equality (of sacrifice).
• To establish equality in sacrifice, taxes are to be imposed in accordance with
the principle of ability to pay.
• In view of this, canon of equality and canon of ability are the two sides of the
same coin.
 Canon of Certainty
• The tax which an individual has to pay should be certain and not
arbitrary.
• According to A. Smith, the time of payment, the manner of payment,
the quantity to be paid, i.e., tax liability, ought all to be clear and
plain to the contributor and to everyone.
• Thus, canon of certainty embraces a lot of things.
• It must be certain to the taxpayer as well as to the tax-levying
authority.
• Not only taxpayers should know when, where and how much taxes
are to be paid. In other words, the certainty of liability must be
known beforehand. Similarly, there must also be certainty of revenue
that the government intends to collect over the given time period
 Canon of Economy and Convenience
Canon of Economy
• This canon implies that the cost of collecting a tax should be as minimum as
possible.
• Any tax that involves high administrative cost and unusual delay in assessment
and high collection of taxes should be avoided altogether.
Canon of Convenience
• Taxes should be levied and collected in such a manner that it provides the
greatest convenience not only to the taxpayer but also to the government. Thus,
it should be painless and trouble-free as far as practicable. “Every tax”, stresses
A. Smith: “ought to be levied at time or the manner in which it is most likely to
be convenient for the contributor to pay it.”
 Canon of Productivity and Elasticity
• Canon of Productivity
• According to a well-known classical economist in the field of public finance, Charles F.
Bastable, taxes must be productive or cost-effective. This implies that the revenue yield
from any tax must be a sizable one.
• Further, this canon states that only those taxes should be imposed that do not hamper
productive effort of the community.
• A tax is said to be a productive one only when it acts as an incentive to production.
• Canon of Elasticity
• Modern economists attach great importance to the canon of elasticity. This canon implies
that a tax should be flexible or elastic in yield.
• It should be levied in such a way that the rate of taxes can be changed according to
exigencies of the situation.
• Whenever the government needs money, it must be able to extract as much income as
possible without generating any harmful consequences through raising tax rates.
• Income tax satisfies this canon.
 Canon of Simplicity
• Every tax must be simple and intelligible to the people so that the taxpayer is
able to calculate it without taking the help of tax consultants.
• A complex as well as a complicated tax is bound to yield undesirable side-
effects.
• It may encourage taxpayers to evade taxes if the tax system is found to be
complicated.
• A complicated tax system is expensive in the sense that even the most honest
educated taxpayers will have to seek advice of the tax consultants.
 Canon of Diversity
• Taxation must be dynamic. This means that a country’s tax structure
ought to be dynamic or diverse in nature rather than having a single
or two taxes.
• Diversification in a tax structure will demand involvement of the
majority of the sectors of the population.
• If a single tax system is introduced, only a particular sector will be
asked to pay to the national exchequer leaving a large number of
population untouched.
• Obviously, incidence of such a tax system will be greatest on certain
taxpayers.
• A dynamic or a diversified tax structure will result in the allocation of
burden of taxes.
Tax classifications
Direct vs Indirect taxation :Tax incidence and impact (The initial and final burdens of a tax may be quite different)

legal incidenceImpact
(statutory Incidence
Tax incidence - economic
incidence); incidence ;
is borne by those who make the tax incidence – ultimate burden
payment of taxes to the is borne by those whose real
government; incomes are reduced as a result of
tax impact concerns where the tax taxes;
first hits; tax incidence concerns its ultimate
resting point;
 Impact versus Incidence
When the incidence and impact are not at the same point, the tax is said to
have been shifted.

 Shifting burden through changes in prices, wages and returns on

investments.
 Direct Versus Indirect Taxes :
Direct taxes
A kind of charge, which is directly
imposed on the taxpayer & directly
paid to the government by the
persons (juristic or natural) &
cannot be shifted by the taxpayer to
someone else.
Indirect taxes
A tax collected by an intermediary (such as
a retail store) from the person who bears the
ultimate economic burden of the tax (such as
the customer).
It can be shifted by the taxpayer to
someone else.
An indirect tax may increase the price of a
good so that consumers are actually paying
the tax by paying more for the products.
 Direct Versus Indirect Taxes :

Direct taxes
Or estate tax/death duty is a tax which
 Income tax
arises on the death of an individual. A
 Corporation tax tax on the estate, or total value of
money & property of a person who has
 Gift tax
 Inheritance tax
died.
 Property tax

Or 'house tax' is a local tax on buildings,

appurtenant land & imposed on owners.
 Direct Versus Indirect Taxes :
Indirect taxes
 Customs duty

 Service tax
 Central excise duty
 Securities transaction tax

 Sales tax

 VAT

The practice of VAT executed by State Governments is applied on each stage of sale,
with a particular apparatus of credit for the input VAT paid.
 Direct Versus Indirect Taxes

Direct Indirect
From the allocation, distribution taxes taxes
and stability perspective

Indirect Indirect
From the productivity and economic
taxes taxes
growth perspective

The use of both direct and indirect taxes is indispensable in

modern public finance.
 Direct Versus Indirect Taxes :

Allocation Effect

Distributive Effect

Administrative Costs

Built-in Flexibility and Stability Advantages and

Growth Orientation
disadvantages
Progressive Advantage of Direct Taxes

Transparency of Direct Taxation

Environmental Benefits of Indirect Taxation

 Direct Versus Indirect Taxes :
Allocation effect
The allocative effects of direct taxes are superior to those
of indirect taxes.
When a particular amount is raised through a direct tax
like income tax, it would imply a lesser burden than the
same amount raised through an indirect tax like excise
duty.

An indirect tax involves excessive burden as it distorts

the consumer's preference regarding goods due to price
changes.

Thus an indirect tax has an adverse effect on the

allocation of resources than a direct tax.
 Direct Versus Indirect Taxes :
Distribution effect
Direct taxes are progressive and they help to reduce
inequalities. But indirect taxes are regressive and they
widen the gap of inequalities.

Hence, direct taxes are regarded to be superior to indirect

taxes in achieving a more equitable distribution of income
and wealth. But this is not always true. Even indirect
taxes can be made progressive by levying them on
luxuries and exempting them on necessaries.

Both direct and indirect taxes are alternative methods of

achieving any particular redistribution of income.
 Direct Versus Indirect Taxes :
Administrative costs
The administrative costs of direct taxes are more than that of
indirect taxes.
Direct taxes are narrow based and has many exemptions.
Indirect taxes can be conveniently collected and cost of collection is
constant overtime.
Indirect taxes are easier to administer than direct taxes

From point of view of efficiency and productivity, indirect taxes are

better.
 Indirect taxes are wrapped up in prices and hence they cannot be
easily evaded. They are more productive as their cost of collection
is the least.
Thus, from point of view of administrative costs, indirect taxes are
relatively superior.
 Direct Versus Indirect Taxes :
Built-in flexibility and stability
Direct taxes are more flexible than indirect taxes. During
a period of prosperity(wealthy), direct taxes fetch/get
more revenue as they are progressive.
But indirect taxes are proportional and they do not fetch
as much revenue as direct taxes.

Direct taxes help to reduce the inflationary pressure by taking away

the excess purchasing power and hence they promote stability.
But indirect taxes are inflationary.
Hence, from the point of stability, direct taxes are
preferred to indirect taxes.
 Direct Versus Indirect Taxes :
Growth orientation(Saving )
Indirect taxes are more growth oriented than direct taxes.
Direct taxes, being progressive, reduce savings.

When savings and investments are discouraged,

economic growth is adversely effected.

Indirect taxes discourage consumption and increase

savings.

Indirect taxes on luxuries reduce conspicuous

consumption and channelize resources in to growth
oriented programs.
 Direct Versus Indirect Taxes :
Progressive advantage of direct taxes
One advantage of direct taxation is that it is easy to apply in a
progressive manner.
 Progressive taxes are a fair way of generating revenue, because
multiple rates of taxation can be applied, based on the ability of the
tax payer to pay the tax, especially if tax rates increase marginally.
For example, a government may apply income tax to earnings at a
rate of 10 percent, for all income earned up to $20,000. Then it
applies a rate of 15 percent to income over $20,000. A person
earning more than $20,000 will pay tax at a rate of 10 percent on
the first $20,000 earned, and only pays 15 percent on earnings over
that amount.
Progressive, marginal, direct taxation is therefore fair because higher
earners bear a greater part of the tax burden, based on their ability to pay higher
rates of tax.
 Direct Versus Indirect Taxes :
Transparency of direct taxation
Direct taxes, which go directly by the person bearing the burden of the tax, are
transparent taxes.
For example, when an employer deducts taxes from the wages of an employee, the
employee can see the amount of tax deducted, as it is included on his or her wage
statement, or pay-slip.
Self-employed tax payers can also see the amount of tax they need to pay to the
government, when they complete their tax returns.
In a democratic country, tax transparency means that governments have to justify taxes
they impose to their voters, and tax-paying voters always aware of the tax burdens
imposed on them by politicians.
 Estate, Inheritance Taxes and Gift Tax

Estate and Inheritance tax

• Both estate and inheritance taxes are imposed on the value of an individual’s property at the
time of their death.
• While estate taxes are paid by the estate itself, before assets are distributed to heirs, inheritance
taxes are paid by those who inherit property.
• Both taxes are usually paired with a “gift tax” so that they cannot be avoided by transferring the
property prior to death.

Gift tax
A gift tax is a federal tax paid by an individual who transfers something of value to another
individual without receiving something of similar value in return.

Gifts can be anything of significant value, such as large sums of money or real estate, and the tax
can be imposed even if the person donating never intended it to be a gift.
 Estate, Inheritance Taxes and Gift Tax

Who Pays the Gift Tax?

It’s the giver of a gift, not the receiver, who would file a gift tax return and
potentially pay the gift tax
 Individual Income

Payroll Taxes
• Payroll taxes are taxes paid on the wages and salaries of employees to
finance social insurance programs.
• Most taxpayers will be familiar with payroll taxes from looking at their
paystub at the end of each pay period, where the amount of payroll tax
withheld by their employer from their income is clearly listed
 Corporate Income Tax

A corporate income tax (CIT) is levied by federal and state governments on business
profits, which are revenues (what a business makes in sales) minus costs (the cost of
doing business)
 Custom Duties

Customs duty refers to the tax imposed on goods when they are transported
across international borders.
In simple terms, it is the tax that is levied on import and export of goods.
The government uses this duty to raise its revenues, safeguard domestic
industries, and regulate movement of goods.
 Customs duties are charged by special authorities and bodies created by
local governments and are meant to protect local industries, economies, and
businesses.
 The rate of Customs duty varies depending on where the goods were made
and what they were made of
The rates of customs duties are either specific or on ad valorem basis, that is,
it is based on the value of goods.
 Custom Duties

While the two terms are used interchangeably, technically speaking, there is a
difference between a duty and a tax:

A duty is a kind of tax that is placed on goods being imported. The purpose
of customs duties is primarily to protect local economies;

A tax is placed on all goods sold in the country, including those being
imported. The primary purpose of taxes is revenue generation for the
government.
 Nature of VAT

is a multi-point tax levied and collected on the value added

to goods at different stages of sale.

It is a method of taxing by stages.

 It is another form of sales tax where tax is collected in

stages rather than collection of the tax at the first or last
point.
 What is value added?
Value that a business adds to the goods and services that it purchases from
others;

A business adds value by processing or handling these purchased items using

its own labour force, machinery and other capital goods (Shoup C 1969;
Warren et al. 2008);

The value that a producer adds to his raw materials or purchases before selling
Implementation of VAT: Example 20%
 Why VAT introduced ?

VAT is seen as more neutral and less distorting than any other commodity

Taxation.

Possibilities of standardization locally and globally.(not taxing export)

Taxes current consumption only.

Unsatisfactory sales taxes (tax cascade)
When a taxed product passes from manufacturer to wholesaler and then to
retailer, tax on tax occurs (cascade tax);
Many of the early users of VAT switched from various forms of cascade
taxes; (mitigate cascade problem)
 Why VAT introduced ?
A reduction of other taxation or to simply increase revenue

Some countries look to a VAT not only to replace existing sales taxes but
also to increase revenue;

 Other reason for the spread of VAT to especially developing and transitional
countries is the advocacy role played by the IMF;

The IMF – the leading ‘Change Agent’ in tax policy in many developing and
transitional countries (Bird and Gendron 2007);
 What is wrong with existing Sales
Tax
Tends to promote Cascading effect.

Too many rates.

Complexity of law and procedure.

Fixation with Revenue maximization.

Administrative hassles.

Intrusive(difficult) Assessment Procedures

 VAT : Benefits of VAT
Unlike turnover tax, there is no cascading—implying no
distortion of methods or forms of production...........and
no distortion of trade, in particular, if levied on the
destination basis. (This is the key theoretical merit
(Diamond-Mirrlees theorem!)

Unlike retail sales tax, not all revenue is lost if final sale
escapes tax

 Tax on the value added to a product at each stage of

production, paid by each producer, and recouped in the
sale price of the product;
 VAT : Benefits of VAT

In some respects, the VAT is (or should be) an ‘easy’ tax

....shifting tax administration from A SYSTEM BASED ON DIRECT and

often face-to-face assessment to one based on....

Voluntary compliance based on self-assessment (meaning that taxpayers

calculate and pay tax due with minimal intervention by authorities, but subject

to audit and penalty)

The success of VAT
A self-assessed tax

A self-policed tax

Extremely efficient cost of collection

Input tax versus output
tax
 VAT(net tax system)
VAT is an all-phase-net tax system because input VAT
passed on to the entrepreneur by his suppliers may generally
be deducted from the entrepreneur`s output VAT on outgoing
supplies.

For this purpose, both types of transactions (input VAT and

output VAT) have to be represented as a special account in
the double entry system

While input VAT shall be entered in the books under

“accounts receivable”, output VAT shall be entered in the
books under “accounts payable”.
 Value Added Tax
• It is mainly made up of:

VAT on VAT Payable/

VAT on Sales
Purchases Reclaimable

LIABILITY ASSET
because it is owed to because it is claimed back
HMRC from HMRC
DEAD/ CLIC
• DEAD stands for: • CLIC stands for:

• Debit • Credit
• Expenses • Liabilities
• Assets • Income
• Drawings • Capital

• DEBIT TRANSACTIONS • CREDIT TRANSACTIONS

• If any of these are • If any of these are
increasing, you will need to increasing, you will need to
debit the account credit the account
 This shows that:

• VAT on Sales Liability (CLIC) will be credited with the TOTAL VAT on Sales amount

• VAT on Purchases Asset (DEAD) will be debited with the TOTAL VAT on Purchases amount
 VAT on
VAT on Sales
Purchases
VAT Payable
 Sources of Input Tax
Purchase or importation of goods
• For sale; or

• For conversion into or intended to form part of a finished product

for sale including packaging materials; or
• For use as supplies in the course of business; or

• For use as materials supplied in the sale of service; or

• For use in trade or business for which deduction for

depreciation / amortization is allowed under the Tax Code

Purchase of services on which VAT has been actually paid

Rate(s), Exemptions and
Thresholds
RATES
 Single and Multiple Rate
In some countries there are different rates for different regions of parts of the
country;

Tax administrators prefer to use a single rate of VAT(once again

ignoring the zero rate on exports).

Politicians nearly always think the public will comply with a VAT
more easily if products consumed by lower income households are taxed at
lower rates than products consumed by the better off;
 International practice
The generally accepted practice is that VAT should be imposed with limited
number of positive rates;

Rates vary throughout the world; in the EU they average between 15% -20%
for the standard rate;

For example, UK and Germany 17.5%, Sweden 25%, Finland 22%, Greece
18% etc.

Indonesia 10%, Singapore 3%, Japan 5%, Vietnam 10%, Ethiopia 15%,
Ghana 15%, Kenya 16% (14% reduced rate) etc.
 Problems of Multiple Rates
The larger the number of VAT rates the more complicated the tax system
and the higher the administrative and compliance costs of VAT;

Multiple rates are likely to distort consumer and producers choices

 Zero-rating
The term zero-rating is used in the VAT Law to refer to supplies of goods
and services that are subject to tax at the rate of zero per cent.

Zero-rated supplies are deemed to be taxable supplies.

If you supply zero-rated supplies, you charge tax to your customers at 0%.

The output tax is nil but you are allowed to recover any input tax that has
been charged by your suppliers, and which goes into making of those
supplies.
 Zero Rate Transactions

Zero Rate: No tax charged but tax is recoverable by

business
• Subject to VAT but will not result to output tax

• Seller is entitled to claim input tax

Food, Books and Newspapers most common

Mexico much wider than most (jewellery, hotel conference

services,)
 Why Zero-rating introduced

The zero-rating concept was introduced in the VAT system to enable

exporters, manufacturers and suppliers of zero-rated goods and services

to claim refund of tax paid on inputs incurred in dealing with zero-rated

supplies.
 Exemption: No tax charged but no tax recoverable

Exempt supplies are not taxable and do not form part of the taxable

 Seller is not allowed to claim input tax , no output tax

Exemptions: Most countries exempt financial services, education, health,
charities.
Financial Services: Difficult to ascertain value for adding tax.
Education, Health, Charities – social reasons.
.....(meaning that no tax is charged on sales, but—unlike zero-rating—tax on
inputs is not recovered)....
Are inconsistent with the basic logic of the VAT ?

56
 VAT threshold
Why High thresholds are favoured?

International consensus that high thresholds are more efficient

Avoids expensive tax collection of small amounts

Removes compliance burden on small business

High cost of maintaining large number of registered businesses

Some problems

Artificial splitting of businesses to keep below threshold

 Excise Tax

• Excise taxes are taxes imposed on a specific good or activity, usually in addition to a broad
consumption tax, and comprise a relatively small and volatile share of total tax collections.
• Common examples of excise taxes include those on cigarettes, alcohol, soda, gasoline, and
betting.
• Excise taxes can be employed as “sin” taxes, to offset externalities.
• An externality is a harmful side effect or consequence not reflected in the cost of
something. For instance, governments may place a special tax on cigarettes in hopes of
reducing consumption and associated health-care costs, or an additional tax on carbon to
curb pollution.
• Excise taxes can also be employed as user fees.
• A good example of this is the gas tax.
• The amount of gas a driver purchases generally reflects their contribution to traffic
congestion and road wear-and-tear.
• Taxing this purchase effectively puts a price on using public roads.
 Progressive Taxes
 Taxes that take an increasing proportion or percentage of one's
(taxable) income as one's (taxable) income increases.

 The higher the (taxable) income, the higher the tax rate, vice
versa; ceteris paribus.

59
 Progressive Taxes: An Example
Income Tax payment Tax rate
= (tax/income)x100%

$10 000 $1 000 $(1 000/10 000) = 10%

$20 000 $3 000 $(3 000/20 000) = 15%

$30 000 $6 000 $(6 000/30 000) = 20%

60
 Proportional Taxes
 Taxes that take the same proportion or percentage of one's
(taxable) income as one's (taxable) income increases.
 The tax rate remains unchanged, regardless of one's (taxable)
income, ceteris paribus.

61
 Proportional Taxes: An Example
Income Tax payment Tax rate
= (tax/income)x100%

$10 000 $1 000 $(1 000/10 000) = 10%

$20 000 $2 000 $(2 000/20 000) = 10%

$30 000 $3 000 $(3 000/30 000) = 10%

62
 Regressive Taxes
 Taxes that take a decreasing proportion or percentage of one's
(taxable) income as one's (taxable) income increases.
 The higher the level of one's (taxable) income, the lower the tax
rate, vice versa; ceteris paribus.

63
 Regressive Taxes: An Example
Income Tax payment Tax rate
= (tax/income)x100%

$10 000 $1 000 $(1 000/10 000) = 10%

$20 000 $1 500 $(1 500/20 000) = 7.5%

$30 000 $1 800 $(1 800/30 000) = 6%

64
Shifting and Incidence of Taxation
 Who really pays? (Tax incidence)

 Formal incidence: Who is legally liable to pay the tax? (Who do we

collect the tax from?)

 Effective incidence: Who ultimately bears the burden of the tax?

(Whose living standard falls as a result of the tax?)
 Effective incidence may differ from formal incidence because the
imposition of a tax can affect demand or supply in the markets for goods
or factors of production, and hence can change equilibrium prices. (Hint
-DWL)
 These changes in prices can shift the burden of a tax away from its
formal incidence.

Alem H.(Ph.D.)
 Who really pays? (Tax incidence)

 All taxes formally incident on business will have their final incidence on
customers, owners (eg shareholders), or employees.

 Generally formal incidence is irrelevant in determining the long run

effective incidence of a tax.

Alem H.(Ph.D.)
 Who really pays? (Tax incidence)
 Taxpayer may be able to shift some or all of the cost of a tax to someone
else.
1. Forward shift: Shift to consumers—increase prices.
2. Backward shift: Shift from purchaser to suppliers—reduce prices paid to
them. For example(1): if the government levies the house tax on the tenants, and the
tenants deduct it while paying the house to the owners of the house . Example(2):
reducing wage in order to decrease employer portion of the social security
contribution
3.Absorption: Absorb tax—lower return to owners.
 Businesses respond so as to maximize after-tax returns to owners.

Alem H.(Ph.D.)
 Who really pays? (Tax incidence)
FACTORS THAT DETERMINE TAX SHIFTING
 Elasticity of DD&SS: The more the elasticity, the lower the incidence
 Nature of the Market: Oligopolistic(few seller determine mkt price)-higher
incidence
 Government Policy on Pricing : In the case of government price control, the supplier
cant increase the price(no shifting )
 Nature of tax: direct tax-PAYE- Can not be shifted but Indirect taxes
 Geographical Location : If taxes are imposed on certain regions, it is hard to shift them
to consumer because consumer will move to region with law tax.

Alem H.(Ph.D.)
Tax Evasion, Avoidance and Delinquency
Tax Avoidance and Evasion
 Tax Planning
 Tax planning can be defined as

an arrangement of one’s financial and economic affairs by taking complete

legitimate benefit of all deductions, exemptions, allowances and rebates so
that tax liability reduces to minimum
 Tax Planning
 Thus, all such arrangements by which the tax laws are fully complied and
which meet all legal obligations and transactions (both individually and as
a whole), representing tax planning not taking form of “colourable
devices” and having no intention to deceit the legal spirit behind the tax
law, would naturally fall within the ambit of tax planning.
 Tax avoidance
Legal methods for avoiding taxes

The line of demarcation between tax planning and tax avoidance is very thin
and blurred.

Any planning of tax which though done strictly according to legal

requirement but defeats/crash the basic intention of the Legislature behind
the statute/decre could be termed as instance of tax avoidance.
 Tax avoidance
Criteria to define tax avoidance
(1) use of colorable devices;
(2) instances where doctrine of substance is defeated;
(3) defeating the genuine spirit of law;
(4) mis-representation or twisting of facts;
(5)taking only strict interpretation of law and suppressing the legislative
intent behind it.
 Tax Planning Versus Tax Avoidance
Tax Planning Tax Avoidance
Tax benefits through using existing provision Avoid paying tax
•tax exemptions • make use of shortcomings and loopholes in the law
•Deductions unfairly for personal benefit
•rebates • you do not violet the law but you override the intent of
the law

•It is honest approach to applying the taxation law to • Example –using transfer pricing
lessen your tax liability

•Legality – legal •Legal but unethical

• Objective –reduce tax liability • objective – to reduce tax liability

 Tax Evasion
Illegal methods for avoiding taxes
All methods by which tax liability is illegally avoided are termed as tax
evasion.
An assesses guilty of tax evasion may be punished under the relevant laws.
Tax evasion may involve stating an untrue statement knowingly, submitting
misleading documents, suppression of facts, not maintaining proper accounts
of income earned (if required under law), omission of material facts on
assessment.
Tax Delinquency
 Tax Delinquency
Tax Delinquency means an unpaid tax liability that has been assessed, for
which all judicial and administrative remedies have been exhausted, or have
lapsed, and that is not being paid in a timely manner pursuant to an agreement
with the authority responsible for collecting the tax liability.