PROJECT REPORT ON

THE IMPACT OF COMPANY INCOME TAX REVENUE ON

THE DEVELOPING ECONOMIES- A COMPARATIVE
ANALYSIS OF BANGLADESH, INDIA

A Project Submitted To

FOR PARTIAL COMPLETION OF THE DEGREE OF B.COM

(ACCOUNTING AND FINANCE) UNDER FACULTY OF
COMMERCE

BY

ROLL NO. 114

Class: TYBAF

College PRN No: 2020300294

Under the Guidance Of

Asst. PROF. SUDAM AHIRROW

K.G. Joshi College of Arts & N.G. Bedekar College of Commerce

(Autonomous) Thane

2, Chendani Bunder Road, Jambli Naka, Thane West - 400601

ACADEMIC YEAR 2022 – 23

I
 CERTIFICATE

Vidya Prasarak Mandal, Thane

K.G. JOSHI COLLEGE OF ARTS & N.G. BEDEKAR COLLEGE

OF COMMERCE (AUTONOMOUS) THANE

CERTIFICATE OF
PROJECT WORK

This is to certify that Mr. MS of B. Com (Accounting & Finance) Semester VI Roll
No. 114 has undertaken & completed the project work titled The impact of
company income tax revenue on the developing economies- A comparative
analysis of Bangladesh, India

During the academic year 2022-23 under the guidance of

Mr./ Ms. PROF. SUDAM AHIRROW

Submitted on to this college in fulfilment of the

Curriculum of BACHELOR OF COMMERCE (Accounting and Finance)

UNIVERSITY OF MUMBAI

This is bonafied project work & the information presented is True & original to the
best of our knowledge and belief.
Date:

PROJECT COURSE EXTERNAL PRINCIPAL

GUIDE CO-ORDINATOR EXAMINER

II
 DECLARATION BY LEARNER

I the undersigned Miss here by, declare that the work embodied in this project work
titled “THE IMPACT OF COMPANY INCOME TAX REVENUE ON THE
DEVELOPING ECONOMIES- A COMPARATIVE ANALYSIS OF
BANGLADESH, INDIA”, forms my own contribution to the research work carried
out under the guidance of PROF. SUDAM AHIRROW a result of my own research
work and has not been previously submitted to any other University for any other
Degree/ Diploma to this or any other University.

Wherever reference has been made to previous works of others, it has been clearly
indicated as such and included in the bibliography.

I, hereby further declare that all information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.

Name and Signature of the learner

Miss

Certified by

Name and signature of the Guiding Teacher

PROF. SUDAM AHIRROW

III
 ACKNOWLEDGMENT

To list who all have helped me is difficult because they are so numerous and the
depth is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to
do this project.

I would like to thank my Principal, Dr. (Mrs) Suchitra A. Naik for giving me
chance to do this project.

I take this opportunity to thank our Coordinator Dr. Neelam Shaikh, for her moral
support and guidance.

I would also like to express my sincere gratitude towards my project guide Prof.
SUDAM AHIRROW whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference
books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped
me in the completion of the project especially my Parents and Peers who supported
me throughout my project.

IV
 INDEX

Sr. Chapter Chapter Page

No. No. Name No.

1 - Title I

2 - Certificate II

- Declaration III

- Acknowledgement IV

- Index VI-VII

1 Chapter 1: Introduction 1-22

1.1 Introduction Of Income Tax 1-4

1.2 Introduction Of Corporate Tax 4-6

1.3 History Of Income Tax 6-10

1.4 Overview 10-11

1.5 Tax Policy For Developing Countries 11-12

1.6 Level Of Tax Revenue 12

1.7 Composition Of Tax Revenue 13-14

1.8 Selecting The Right Tax System 14-15

1.9 Personal Income Tax 15-16

1.10 Corporate Income Tax 16-17

1.11 Types Of Taxes 17-18

1.12 Definition 18-19

2 Chapter 2: Research Methodology 20-30

2.1 Objectives Of Study 22

2.2 Scope Of Study 22-24

2.3 Significance Of Study 24-25

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 2.4 Limitation Of Study 25-26

2.5 Source of Data Collection 26-27

2.6 Economic Growth 27-30

3 Chapter 3: Review Of Literature 31-

3.1 Non-Compliance 48-49

3.2 EVSCALE 49

3.3 Income Level And Income Tax Non- 49

Compliance

3.4 Age And Income Tax Non-Compliance 49

3.5 Role Of Tax Knowledge And Tax Morale 50

On Income Tax Non-Compliance

3.6 Occupational Obligation And Income Tax 50

Non-Compliance

3.7 Gap Study 50

4 Chapter 4: Data Interpretation 51-60

5 Chapter 5: Conclusion 61-76

5.1 Conclusion 63-66

5.2 Suggestions 66-68

5.3 Recommendations 68-69

6 References 70-72

7 Bibliography 73-74

8 Annexure 75-76

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 CHAPTER 1. INTRODUCTION

1.1 INTRODUCTION OF INCOME TAX

An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the
income or profits earned by them (commonly called taxable income). Income tax
generally is computed as the product of a tax rate times the taxable income. Taxation
rates may vary by type or characteristics of the taxpayer and the type of income.

The tax rate may increase as taxable income increases (referred to as graduated
or progressive tax rates). The tax imposed on companies is usually known
as corporate tax and is commonly levied at a flat rate. Individual income is often taxed
at progressive rates where the tax rate applied to each additional unit of income
increases (e.g., the first $10,000 of income taxed at 0%, the next $10,000 taxed at 1%,
etc.). Most jurisdictions exempt local charitable organizations from tax. Income from
investments may be taxed at different (generally lower) rates than other types of
income. Credits of various sorts may be allowed that reduce tax. Some jurisdictions
impose the higher of an income tax or a tax on an alternative base or measure of
income.

Taxable income of taxpayers resident in the jurisdiction is generally total income less
income producing expenses and other deductions. Generally, only net gain from the
sale of property, including goods held for sale, is included in income. The income of a
corporation's shareholders usually includes distributions of profits from the
corporation. Deductions typically include all income-producing or business expenses
including an allowance for recovery of costs of business assets. Many jurisdictions
allow notional deductions for individuals and may allow deduction of some personal
expenses. Most jurisdictions either do not tax income earned outside the jurisdiction
or allow a credit for taxes paid to other jurisdictions on such income. Non-residents
are taxed only on certain types of income from sources within the jurisdictions, with
few exceptions.

Taxation is the primary source of income for the government. The most important
revenue receipts for the government, taxes are involuntary fees levied on individuals
and corporations to finance government activities. Revenue receipts can be of two
types — non-tax revenue and tax revenue. Tax revenue is the income gained by the
government through taxation.

Tax revenue forms a part of the Receipt Budget, which in turn is part of the Annual
Financial Statement of the Union Budget.

Tax revenue is the result of the application of a tax rate to a tax base. Total tax
revenue as a percentage of GDP indicates the share of the country's output collected
by the government through taxes. Tax revenue can be regarded as one measure of the
degree to which the government controls the economy's resources.

Taxes collected from both direct tax and indirect tax are the government’s tax
revenue. It includes collections from income tax, corporation tax, customs, wealth tax,
tax on land revenue, etc.

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Direct tax is the tax that is paid directly to the government by the person or company
on whom it is levied. Income tax, wealth tax, corporation tax and property tax are
some examples of direct tax. Indirect taxes are those that are collected by
intermediaries from individuals and corporations who bear the burden of the tax and
passed on to the government. Goods and Services Tax (TAX) is an example of
indirect tax. Corporation tax forms a large chunk of the government’s tax revenue.

Most jurisdictions require self-assessment of the tax and require payers of some types
of income to withhold tax from those payments. Advance payments of tax by
taxpayers may be required. Taxpayers not timely paying tax owed are generally
subject to significant penalties, which may include jail for individuals. Taxable
income of taxpayers resident in the jurisdiction is generally total income less income
producing expenses and other deductions. Generally, only net gain from the sale of
property, including goods held for sale, is included in income. The income of a
corporation's shareholders usually includes distributions of profits from the
corporation. Deductions typically include all income-producing or business expenses
including an allowance for recovery of costs of business assets. Many jurisdictions
allow notional deductions for individuals and may allow deduction of some personal
expenses. Most jurisdictions either do not tax income earned outside the jurisdiction
or allow a credit for taxes paid to other jurisdictions on such income. Non-residents
are taxed only on certain types of income from sources within the jurisdictions, with
few exceptions.

The imperialist rulers of India were confronted with first 'Great Liberation Movement'
in 1857, which was called by them 'Sepoy Mutiny'. Accordingly, the experiment,
which the British imperialists had resorted to in their own country in 1879to finance
the war against France' by introduction of tax on income and which came to stay In
England In order to meet various governmental expenditure was conducted In India
by introduction of income-tax for the first time in 1860. Initially, it was only a
temporary measure of raising revenue on a permanent basis, but now it occupies an
important place in the Indian tax system. The history of income-tax in India may be
divided Into three clearcut periods: (1) 1860-1885, (2) 1886-1914, and (3) from the
First World War todate. The first period was a period of experiment. The tax was
twice introduced in 1860 and 1869 and twice abandoned in 1865 and 1873. In the
second period, the income-tax policy of the government overgrew its trial-and-error
stage and came to acquire definiteness The third period is the period of vital reforms
in income-tax law. In the earlier part of this period, the enactments relating to the tax
were so numerous that the necessity arose of repealing all the previous enactments
and having one single statute in their place.

Thus camn the Income-tax Act of 1922.2 The Indian Income-tax Act of 1922 had
witnessed innumerable amendments which rendered the Act grossly divorced from its
original identity. Accordingly, the political administrators of Free India felt the
necessity of replacing the 1922 Act. Consequently, the Law Commission was required
to consider the matter in 1956 and the Commission submitted on September 26, 1958,
its TwelfthReport with a draft Bill of the new Act. In the meantime, the Direct Taxes
Administration Enquiry Committee had also been appointed in 1958 under the
chairmanship of Shri.Mahabir Tyagi to consider the matter. The committee made its
recommendations in 1959. The result was the introduction of the new Income-tax »
Bill, 1961, in the Parliament, which received the assent of the Parliament on

4
September 13th, 1961, and came into force from April, 1962, repealing the Indian
Income-tax Act, 1922, which had been in operation for four decades and which was
sought to be replaced by a more simplified code.
Whether income is an accurate measure of taxpaying ability depends on how income
is defined. The only definition that has been found to be completely consistent and
free from anomalies and capricious results is “accrued income,” which is
the money value of the goods and services consumed by the taxpayer plus or minus
any change in net worth during a given period of time. (Tax experts commonly call
this the Haig-Simons definition of income, based on work by American economists
Robert M. Haig and Henry Simons.) This definition cannot be applied without
important modifications. First, many tax codes do not consider as taxable income
those changes in net worth resulting from gifts, bequests, and
other gratuitous transfers. Second, because of the difficulties of estimation, most
accretions to wealth are ordinarily not included in an individual’s taxable income until
they are “realized”—that is, converted into cash or some easily valued form. Finally,
and for much the same reason, most countries have chosen not to include in taxable
income such forms of imputed income as the rental value of owner-occupied homes.

In some countries the individual income tax is imposed on the total income of an
individual or family unit, whereas in others income from different sources is taxed
under separate rules and often at somewhat different rates. The use of
multiple schedules is questionable on grounds of both neutrality and
horizontal equity (persons with the same income, under like circumstances, paying the
same amount of tax), and countries with schedular taxes frequently supplement them
with a progressive rate scale applicable to total income. These schedular income taxes
are today found in some South American and African countries. In most industrialized
countries, such as Great Britain, personal income has to be reported on one of a
number of separate schedules, but assessable income is then lumped and only one tax
is imposed. This kind of individual income tax is not usually regarded as a schedular
tax. By comparison, the Scandinavian countries have recently adopted “dual” systems
in which labour income is subject to graduated rates, but capital income is subject to
flat rates. The United States has adopted antishelter provisions that have the effect of
converting a nominally global income tax into one having schedular features.

Before a tax on personal income can be considered to be a completely fair tax, it has
to meet the tests of horizontal and vertical equity. Pivotal to the first test is the
definition of “like circumstances” when considering taxes imposed on individuals
with the same income. Clearly, two families with the same income would not be
equally able to pay taxes if one consisted of husband and wife and the other of
husband, wife, and four dependent children. On the other hand, if neither family had
any children but in one the entire income was earned by the husband whereas in the
other both husband and wife worked, would horizontal equity require that they pay
the same or different taxes? Similar questions have been raised concerning families
whose equal incomes take the form of wages and salaries in one case and dividends
and interest in another or whose income has to be used to pay personal debts (such as

5
medical expenses) or to pay state and local taxes to a greater extent in one case than in
the other. In order to compensate for those differences in the sources and uses of
income that are thought to affect an individual’s ability to pay income tax, most
countries allow a wide variety of deductions from statutory personal income before
the tax is imposed.

The concept of vertical equity relates to the taxes paid by individuals at different
income levels. Clearly, if income is a good index of ability to pay, the taxes for these
individuals should not be the same, but how different should taxes be at different
income levels? If a single rate of tax is applied to all individual income in excess of
the allowed exclusions, exemptions, and deductions, the tax will be proportionate to
taxable income (although it may be progressive when compared with total income). If,
however, different tax rates are applicable to different blocks or brackets of income,
and if these rates rise as one moves from the lowest bracket to successively higher
ones, the tax will be progressive. Those countries that tax total individual income
today almost always use graduated or progressive rates; those with schedular income
taxes may or may not do so.

Many attempts have been made to develop a theory that would not only justify the
principle of progression but also result in a mathematically exact scale of equitable
taxation. Some theorists, accepting the notion that the taxes a person pays ought to
bear some close relation to the benefits the taxpayer enjoys from the operation of
government, have tried to show that, at some levels of income, benefits increase more
rapidly than income. But their efforts have served to do little more than reveal the
shortcomings of “benefit theory.” Others, starting with the premise that an equitable
tax is one that imposes equal sacrifices on individuals at different income levels and
accepting the view that the utility of any given unit of money becomes less the more
money one has, have tried to demonstrate that progression is needed if the sacrifices
imposed on the wealthy are not to be less than those imposed on persons less-well-off.

1.2 INTRODUCTION OF CORPORATE TAX

A corporate tax is a levy which the government imposes on the income of a company.
The money collected from corporate taxes is used as the source of revenue for a
country. Operating earnings of a company are determined by deducting costs from the
cost of the product sold (COGS) and income depreciation.

First, tax rates are applied to establish a legal duty the corporation owes to the
government. Regulations relating to corporate taxes vary widely across the world, but
they must be voted on and approved by the government of a country for enactment.

Some regions, like Jersey, are considered tax havens, and are highly coveted by
companies as such.

UNDERSTANDING CORPORATE TAX IN INDIA:

6
A corporation is an individual with a distinct and autonomous legal body compared
with its shareholders. According to the Income Tax Act, domestic and international
corporations are liable to pay income tax.

While a domestic corporation is taxed on its universal income, a foreign corporation is

imposed only on the income earned within India, i.e. accrued or obtained within India.

For tax calculation under the Income Tax Act, the types of companies may be
described as:

1. Domestic Company: Domestic Company is one that is listed under India's

Companies Act and also involves the foreign-owned firm that has control and
management wholly based in India. A domestic business includes both private and
public companies.

2. Foreign Company: Foreign Company is one that is not listed under the Indian
Company Act and has control and management outside of India.

Corporate tax is based on a company's taxable profit or net income. A company's

operating profit/net profits is the overall sum left with the company after the requisite
deduction of different expenditures has been made. A company incurs a host of
expenses for selling products.

UNDERSTANDING CORPORATE TAX IN BANGLADESH:

Every company, Branch office, liaison office, representative registered in Bangladesh

must file an annual tax return to National Board of Revenue (NBR).

Annual Company tax return is provided information regarding company’s income,

expense, net profit before tax, assets and liabilities. It is also used to determine tax
liability, Tax deducted at source etc.

The tax liability of a company in Bangladesh depends on the activity and legal status
of particular company. Income tax rate is varying according to company’s types of
business activity and legal status of the company.

Company must paid minimum tax @0.3% tax on their gross receipt, if their normal
tax liability fall less than minimum tax.

How can Company’s taxes be reduced?

A company can get benefit of reduced taxes in numerous ways. Different kinds of
reduced tax benefits are given below:

i) offset taxable loss and carry forward up to six years,

ii) given depreciation allowances,

iii) Tax exemption given on newly established ” industrial undertakings”

iv) Tax exemption given on income of “ tourist industry”

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v) Tax exemption given on newly established “physical infrastructure facility”.

vi) Tax exemption given those company, if those manufacturing company set up their
plant in the area under

“Bangladesh Export processing zone Association” (BEPZA).

vii) If any Company converts it as a public limited company by transferring 20% of

its paid up capital to stock exchange by Initial public offering (IPO), then those public
company get 10% tax rebate for the year of IPO.

viii) Income of Company’s provident fund and gratuity income are exempted , if their
provident

Fund and gratuity fund are approved from NBR.

ix) Company get rebate on their approved Corporate Social Responsibility (CSR)

Activity.

1.3 HISTORY OF INCOME TAX

INDIA:

It was in 1850 that Sir James Willson formally introduced the tax in India. He was
the finance minister of the pre -Independent India. He introduced the tax during the
first union budget session under British rule. The Indian Income Tax act of 1860
marks the watershed moment for taxation in India. It is through this act that centrally
organized taxation began in India. The act was introduced to recover the losses the
government suffered from the 1857 military mutiny.

Under this act, the taxation was divided into four subgroups. The incomes from land,
professions or trade, securities, and salaries/pensions were taxed under this new act.

The Indian Income Tax act formed the basis of taxation laws in India. However, it
was revised and replaced over the course of decades. The law was revised in 1886 to
improvise on some categories for which tax can be levied. The new categories
included net salaries and profits from businesses.

The next revisions came in 1918 and 1922. The act of 1918 repealed the 1886 act and
formed many new important changes. The act of 1922 is extremely important since it
has since then that India started to have an operational Income Tax Department. This
act distinguished various departments of the Income-tax authorities. Over the years
the act became more and more complicated over the years due to the amendments
made by various governments over the course of decades. The act of 1922 remained
in

effect in India till 1961. The act was brought by the British and later in 1956
Government of India referred to a law commission to make it simpler.

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The Indian Income Tax act of 1961 came into effect after consultation with the
Ministry of law. It was brought into force in April 1962. All citizens of India are
bound by this act. Since 1962 many amendments have been made to the act annually
by the Union Budget. The bills become acts after it is passed by both upper and lower
houses of parliament and get presidential assent to it. Currently, five categories of
income are considered for tax. They are as follows: salary, property, capital gains,
profits from businesses and other sources of income.

The Income Tax act of 1961 is long. It has 23 chapters, 298 sections and 14 schedules
in it.

BANGLADESH:

Income tax was first introduced in the subcontinent by the British in 1860 to make up
the revenue deficit caused by the SEPOY REVOLT, 1857. After independence of
Bangladesh, income tax was made effective under the Income Tax Act 1922 passed
on the basis of the recommendations of the All-India Income Tax Committee
appointed in 1921. Currently, income tax has been imposed under the Income Tax
Ordinance 1984 (ITO) promulgated on the basis of recommendations of the Final
Report of the Taxation Enquiry Commission submitted in April 1979. Income
taxpayers (assessees) are classified as individuals, partnership firms, Hindu undivided
families (HUF), associations of persons (AOP), companies (publicly traded and
private), local authorities, and other artificial juridical persons. Tax rates and scope of
taxable income differ on the basis of residential status of an assessee (resident or non-
resident).

Taxpayers can submit tax return under 'universal self-assessment' (since assessment
year 2007-08) or 'normal' scheme. In the classified income tax return, a non-corporate
assessee has to show his/her total taxable income under 9 heads of domestic income
and 1 head of foreign income; but a corporate assessee has to file a separate tax return
showing 6 heads of income. Tax-base for income taxation is 'annual total income'
computed with consideration of a number of 'exclusions' provided in Part-A, Sixth
Schedule of the ITO.

Value-added tax (VAT) in Bangladesh was introduced in 1991, replacing sales tax
and most excise duties. The Value Added Tax Act, 1991 was enacted that year and
VAT started its passage from 10 July 1991. In Bangladesh, 10 July is observed as
National VAT Day. Within the passage of 25 years, VAT has become the largest
source of Government Revenue. About 56% of total tax revenue is VAT revenue in
Bangladesh. Standard VAT rate is 15%. Export is zero rated.

Besides these rates there are several reduced rates, locally called Truncated Rates, for
service sectors ranging from 1.5% to 10%. To increase the productivity of VAT, the
Government enacted the Value Added Tax and Supplementary Duty Act of 2012.
This law was initially scheduled to operate online with an automated administration
from 1 July 2017, however this pilot project was extended for another two years.

The learning from India and Bangladesh’s growth stories is different from what
features frequently, quite unfairly, in the Indian media space.

9
Over the past few years, the Indian media has been obsessed with comparing the
economies of India and Bangladesh.

For a while, Bangladesh surpassed India in terms of per capita income. This data point
led to frenzied media commentary about how India should have learnt the right
lessons from Bangladesh’s meteoric economic rise.

As the world came to be gripped by a pandemic, followed by the conflict in Ukraine,

the rough macroeconomic edges of many countries showed up. Bangladesh was one
of them.

The Government of Bangladesh had to consider approaching the International

Monetary Fund (IMF) to bail the country out of an adverse balance-of-payment
situation, aggravated by prohibitive global energy costs.

So, how did a country which was the poster child for economic miracles just before
the pandemic had to look towards the IMF for survival?

Especially, how did a country whose strength was exports ended up facing a balance-
of-payment problem?

The answers lie in premature proclamations of Bangladesh’s economic miracle.

To be sure, Bangladesh is most definitely a smashing economic success. From a gross

domestic product (GDP) of $4 billion in 1960, it hit a high of $416 billion in 2021,
about a hundred times rise over 50 years, a strong performance.

The per capita income is touching $2,500, higher than in India. Bangladesh has an
annual export base nearing $50 billion, a very healthy 12 per cent exports-to-GDP
ratio.

And, yet, these numbers do not paint the full picture.

Bangladesh became an export powerhouse largely as a textile success story. It has

remained a one-trick pony, in that its textile exports form almost 70 per cent of the
total exports. The sectoral spread has been very poor despite a two-decade runway of
export growth performance.

Even within textiles, Bangladesh exports lower-end, low-margin products with little
depth of expertise in more complex areas like technical textiles or textile machinery.
The successful domination of the

low-end global textile market has not translated into significant labor force
productivity and associated wage curve shift.

At least, as yet, the success of Bangladeshi exports carries neither width nor depth.
This skin-deep growth has been exposed as the inelastic exports — energy, consumer
goods, agriculture inputs, and food grains — have become dearer due to the twin
inflation events of the pandemic and the war.

Some more digging on textile markets brings out yet another difference between India
and Bangladesh’s export situation.

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India has 40 per cent share in American textile imports and has been either the first-
or second-biggest supplier for most of the recent years. However, when it comes to
the European Union (EU), India only has a 10 per cent market share and ranked a
relatively distant fourth to sixth, with Bangladesh, Pakistan, and Turkey consistently
staying over India.

In fact, Indian textile exports have declined at 5 percent compounded annual growth
rate (CAGR) to Europe over the period 2014-2020.

Why is it that India is able to outcompete its rivals in the United States (US) but not in
Europe?

The answer lies in an age-old global trade feature known as the Generalised System of
Preferences or GSP.

Members of the General Agreement on Tariff and Trade (GATT) decided to allow for
a generalized, non-discriminatory, and non-reciprocal system of tariff preferences to
be awarded by some members to others, deviating from the most-favored nation
principle.

The idea was that the richer countries can allow the developing ones to get greater
market access through preferential tariffs. The US as well as the EU have run their
own version of this program since the 1970s.

While a member can make adjustments to its programs, changing recipient countries
and product coverage periodically, developed countries keep offering the GSP to the
least developed countries or LDCs.

While India has been left out of various GSP categories by some developed members
of the World Trade Organization (WTO), the successor to GATT, Bangladesh
continues to enjoy the benefits of GSP.

It has led to an 8-12 per cent duty benefit for Bangladesh in the EU markets. For low-
end textiles, this is a make-or-break difference as the margin on these products itself
may be lesser than the duty advantage with Bangladesh.

Stated simply, India may not be able to compete with Bangladesh for basic textile
products in the markets where Bangladesh enjoys GSP benefits, unless Indian value
chain participants decide to make no profits at all. This is clearly untenable.

Bangladesh has been marked for graduation out of the LDC status in 2026 by the
United Nations. Based on the commentary one reads on Bangladesh, it would appear
that a graduation from an LDC to a developing country would instill a sense of pride
and confidence.

Yet, since the possibility of Bangladesh’s change in position came to the fore, the
country has been fighting in the WTO to retain its LDC GSP benefits.

In the February meeting of the WTO General Council, whose minutes are available in
the document “WTO/GC/M/196” on the WTO website, the Ambassador of
Bangladesh pleaded on the LDC graduation proposal:

11
“There are several unilateral LDC-specific GSP schemes where there are procedures
available to extend LDC trade preferences to graduated countries for a certain time-
period… It is up to the preference-granting members to see how they want to consider
the extension of their unilateral LDC-specific schemes to the same Members for a
defined period after graduation… What we are calling for is a best effort.”

This is not a one-off case. Bangladesh has pleaded to retain its GSP benefits for
almost four years in the WTO. Members like the US and EU are not too keen to let
graduating LDCs operate with GSP benefits.

In fact, India has stood out as a rock-solid defender of LDCs on this agenda as the
General Council meetings indicate. India also provides a ‘Duty Free Quota Free’
access to its own markets to all LDCs.

This situation shows that even very high economic growth may not by itself be
sufficient to thwart exogenous shocks. The balance-of-payment situation requires
macroeconomic management finesse and a large, diversified economy to leverage.

India’s government and the Reserve Bank of India have shown out to use cyclical and
countercyclical measures to manage external shocks. India also remains vulnerable to
protracted global problems, not as seriously as its neighbors.

From India’s point of view, the ongoing free trade agreement negotiations with the
United Kingdom and the EU become important. Once the tariff cuts on textiles and
other labor-intensive industries are negotiated, Indian firms will most certainly gain
market share — mostly from Bangladeshi firms — in these markets.

Sovereigns can, and should, always learn from each other. But the expectations of
learning must be grounded in real data analysis and a well-rounded worldview of
relative competitive advantages. This is the learning from India and Bangladesh’s
growth stories.

Over the past few years, the Indian media has been obsessed with comparing the
economies of India and Bangladesh.

For a while, Bangladesh surpassed India in terms of per capita income. This data point
led to frenzied media commentary about how India should have learnt the right
lessons from Bangladesh’s meteoric economic rise.

1.4 OVERVIEW
Apart from surpassing India in economic indexes like GDP and per capita income,
Bangladesh has also left India behind in the GDP growth rate. According to the World
Bank, where India’s GDP growth was 8 percent in 2015, it became -6.6 percent in
2020. On the other hand, at the same time, Bangladesh consistently maintained a GDP
growth rate of 6 to 7 percent. Although it dropped to 3.4 percent in 2020, it reached
6.9 percent again in 2021. Apart from economic indexes, Bangladesh has surpassed
India in various social indices. For example, according to the UN Sustainable
Development Goals or SDG Index, Bangladesh is currently ranked 104th with a score

12
of 64.2, while India is ranked 121st with a score of 60.32. In 2020, the infant
mortality rate in Bangladesh was 29 per thousand, while in India, it was 33 per
thousand. Besides, the literacy rate among 15 to 24-year-olds is 94.5 percent in
Bangladesh which is 91.5 percent in India. Again, Bangladeshi women are ahead of
Indian women in education.

On the other hand, 30.4 percent of women of the total population in Bangladesh are
working in various occupations, while in India, the rate is only 20.3 percent.
Moreover, in 2019, Bangladesh had an average life expectancy rate of 74 years, while
it was just 60 years in India. Furthermore, Bangladesh ranks 7th out of 117 countries
in the Global Hunger Index, whereas India ranks 101st.

Besides, Bangladesh ranks 2nd in the world after China regarding RMG exports, and
India ranks 4th. While India exported RMG worth $16 billion in FY 2021-22,
Bangladesh’s exports amounted to $43 billion. According to an article in the Times
of India, over the past decade, Bangladesh’s IT export earnings have increased from
$800 million to $5 billion, which is equivalent to India’s $35 billion in terms of
population. However, the journey of the IT industry in Bangladesh started much later
than in India.

1.5 TAX POLICY FOR DEVELOPING COUNTRIES

Why do we have taxes? The simple answer is that, until someone comes up with a
better idea, taxation is the only practical means of raising the revenue to finance
government spending on the goods and services that most of us demand. Setting up an
efficient and fair tax system is, however, far from simple, particularly for developing
countries that want to become integrated in the international economy. The ideal tax
system in these countries should raise essential revenue without excessive government
borrowing, and should do so without discouraging economic activity and without
deviating too much from tax systems in other countries.

Developing countries face formidable challenges when they attempt to establish

efficient tax systems. First, most workers in these countries are typically employed in
agriculture or in small, informal enterprises. As they are seldom paid a regular, fixed
wage, their earnings fluctuate, and many are paid in cash, "off the books." The base
for an income tax is therefore hard to calculate. Nor do workers in these countries
typically spend their earnings in large stores that keep accurate records of sales and
inventories. As a result, modern means of raising revenue, such as income taxes and
consumer taxes, play a diminished role in these economies, and the possibility that the
government will achieve high tax levels is virtually excluded.

Second, it is difficult to create an efficient tax administration without a well-educated

and well-trained staff, when money is lacking to pay good wages to tax officials and
to computerize the operation (or even to provide efficient telephone and mail
services), and when taxpayers have limited ability to keep accounts. As a result,
governments often take the path of least resistance, developing tax systems that allow
them to exploit whatever options are available rather than establishing rational,
modern, and efficient tax systems.

13
Third, because of the informal structure of the economy in many developing countries
and because of financial limitations, statistical and tax offices have difficulty in
generating reliable statistics. This lack of data prevents policymakers from assessing
the potential impact of major changes to the tax system. As a result, marginal changes
are often preferred over major structural changes, even when the latter are clearly
preferable. This perpetuates inefficient tax structures.

Fourth, income tends to be unevenly distributed within developing countries.

Although raising high tax revenues in this situation ideally calls for the rich to be
taxed more heavily than the poor, the economic and political power of rich taxpayers
often allows them to prevent fiscal reforms that would increase their tax burdens. This
explains in part why many developing countries have not fully exploited personal
income and property taxes and why their tax systems rarely achieve satisfactory
progressivity (in other words, where the rich pay proportionately more taxes).

In conclusion, in developing countries, tax policy is often the art of the possible rather
than the pursuit of the optimal. It is therefore not surprising that economic theory and
especially optimal taxation literature have had relatively little impact on the design of
tax systems in these countries..

1.6 LEVEL OF TAX REVENUE

What level of public spending is desirable for a developing country at a given level of
national income? Should the government spend one-tenth of national income? A
third? Half? Only when this question has been answered can the next question be
addressed of where to set the ideal level of tax revenue; determining the optimal tax
level is conceptually equivalent to determining the optimal level of government
spending. Unfortunately, the vast literature on optimal tax theory provides little
practical guidance on how to integrate the optimal level of tax revenue with the
optimal level of government expenditure.

Nevertheless, an alternative, statistically based approach to assessing whether the

overall tax level in a developing country is appropriate consists of comparing the tax
level in a specific country to the average tax burden of a representative group of both
developing and industrial countries, taking into account some of these countries'
similarities and dissimilarities. This comparison indicates only whether the country's
tax level, relative to other countries and taking into account various characteristics, is
above or below the average. This statistical approach has no theoretical basis and does
not indicate the "optimal" tax level for any country. The most recent data show that
the tax level in major industrialized countries (members of the Organization for
Economic Cooperation and Development or OECD) is about double the tax level in a
representative sample of developing countries (38 percent of GDP compared with 18
percent).

Economic development will often generate additional needs for tax revenue to finance
a rise in public spending, but at the same time it increases the countries' ability to raise
revenue to meet these needs.

14
More important than the level of taxation per se is how revenue is used. Given the
complexity of the development process, it is doubtful that the concept of an optimal
level of taxation robustly linked to different stages of economic development could
ever be meaningfully derived for any country.

1.7 COMPOSITION OF TAX REVENUE

Turning to the composition of tax revenue, we find ourselves in an area of conflicting
theories. The issues involve the taxation of income relative to that of consumption and
under consumption, the taxation of imports versus the taxation of domestic
consumption. Both efficiency (whether the tax enhances or diminishes the overall
welfare of those who are taxed) and equity (whether the tax is fair to everybody) are
central to the analysis.

The conventional belief that taxing income entails a higher welfare (efficiency) cost
than taxing consumption is based in part on the fact that income tax, which contains
elements of both a labor tax and a capital tax, reduces the taxpayer's ability to save.
Doubt has been cast on this belief, however, by considerations of the crucial role of
the length of the taxpayer's planning horizon and the cost of human and physical
capital accumulation. The upshot of these theoretical considerations renders the
relative welfare costs of the two taxes (income and consumption) uncertain.

Another concern in the choice between taxing income and taxing consumption
involves their relative impact on equity. Taxing consumption has traditionally been
thought to be inherently more regressive (that is, harder on the poor than the rich) than
taxing income. Doubt has been cast on this belief as well. Theoretical and practical
considerations suggest that the equity concerns about the traditional form of taxing
consumption are probably overstated and that, for developing countries, attempts to
address these concerns by such initiatives as graduated consumption taxes would be
ineffective and administratively impractical.

With regard to taxes on imports, lowering these taxes will lead to more competition
from foreign enterprises. While reducing protection of domestic industries from this
foreign competition is an inevitable consequence, or even the objective, of a trade
liberalization program, reduced budgetary revenue would be an unwelcome by-
product of the program. Feasible compensatory revenue measures under the
circumstances almost always involve increasing domestic consumption taxes. Rarely
would increasing income taxes be considered a viable option on the grounds of both
policy (because of their perceived negative impact on investment) and administration
(because their revenue yield is less certain and less timely than that from consumption
tax changes).

Data from industrial and developing countries show that the ratio of income to
consumption taxes in industrial countries has consistently remained more than double
the ratio in developing countries. (That is, compared with developing countries,
industrial countries derive proportionally twice as much revenue from income tax
than from consumption tax.) The data also reveal a notable difference in the ratio of
corporate income tax to personal income tax. Industrial countries raise about four
times as much from personal income tax than from corporate income tax. Differences

15
between the two country groups in wage income, in the sophistication of the tax
administration, and in the political power of the richest segment of the population are
the primary contributors to this disparity. On the other hand, revenue from trade taxes
is significantly higher in developing countries than in industrial countries.

While it is difficult to draw clear-cut normative policy prescriptions from

international comparisons as regards the income-consumption tax mix, a compelling
implication revealed by the comparison is that economic development tends to lead to
a relative shift in the composition of revenue from consumption to personal income
taxes. At any given point of time, however, the important tax policy issue for
developing countries is not so much to determine the optimal tax mix as to spell out
clearly the objectives to be achieved by any contemplated shift in the mix, to assess
the economic consequences (for efficiency and equity) of such a shift, and to
implement compensatory measures if the poor are made worse off by the shift.

1.8 SELECTING THE RIGHT TAX SYSTEM

In developing countries where market forces are increasingly important in allocating
resources, the design of the tax system should be as neutral as possible so as to
minimize interference in the allocation process. The system should also have simple
and transparent administrative procedures so that it is clear if the system is not being
enforced as designed.

SOURCES OF FEDERAL GOVERNMENT REVENUE

Taxes has two parts:

(1)A base and

(2) Rate structure.

The base is the measure or value upon which a tax is levied. The base can be
measures such as income, sales purchases, home value, corporate profits, etc... The
tax rate structure is the percentage of the tax base that must be paid in taxes. For
example if you pay 35% of your income in taxes, then your income is the tax base,
and 35% is the tax rate structure. The tax base can either be a stock measure
(property, inheritance) or a flow measure (income, sales).

(1) INDIVIDUAL INCOME TAX

This is the tax you are most familiar with. Individuals must pay this tax by April 15.
During the year the government withholds a portion of each pay check as tax
payments. Table shows that individual income tax has been and still is the single
largest component of federal revenue overtime.

(2) SOCIAL INSURANCE TAXES

These taxes are levied on income to pay for Social Security (retirement fund for the
elderly) and Medicare (health care for the elderly) Note how these taxes has increased

16
over time. In 1960, social insurance taxes comprised only about16% of total revenues,
by 2008 that amount had reached almost 35%.

(3) CORPORATE TAXES

The corporate tax is a tax levied on the earnings of corporations. This tax was an
important source of revenues in the mid-20th century, but has become less
important over time. The existence of tax shelters, laws to stimulate R&D, and
complex rules regarding taxing multinational corporations have all led to a decline in
the importance of corporate taxes as a source of federal revenue.

(4) OTHER TAXES

The other sources of government revenue are relatively minor. Excise taxes are taxes
that are levied on the sale of certain products such as gasoline, cigarettes, alcohol,
etc...Estate taxes (sometimes called the “death tax”) are levied on estates of
individuals when they passed away Custom duties are taxes levied on goods imported
to the United States such as foreign cars or wines. Combined, these sources of federal
revenues accounted for only 6.6% of total revenues in2008.

1.9 PERSONAL INCOME TAX

Any discussion of personal income tax in developing countries must start with the
observation that this tax has yielded relatively little revenue in most of these countries
and that the number of individuals subject to this tax (especially at the highest
marginal rate) is small. The rate structure of the personal income tax is the most
visible policy instrument available to most governments in developing countries to
underscore their commitment.

Social justice and hence to gain political support for their policies. Countries
frequently attach great importance to maintaining some degree of nominal
progressivity in this tax by applying many rate brackets, and they are reluctant to
adopt reforms that will reduce the number of these brackets.

More often than not, however, the effectiveness of rate progressivity is severely
undercut by high personal exemptions and the plethora of other exemptions and
deductions that benefit those with high incomes (for example, the exemption of
capital gains from tax, generous deductions for medical and educational expenses, the
low taxation of financial income). Tax relief through deductions is particularly
egregious because these deductions typically increase in the higher tax brackets.
Experience compellingly suggests that effective rate progressivity could be improved
by reducing the degree of nominal rate progressivity and the number of brackets and
reducing exemptions and deductions. Indeed, any reasonable equity objective would
require no more than a few nominal rate brackets in the personal income tax structure.
If political constraints prevent a meaningful restructuring of rates, a substantial

17
improvement in equity could still be achieved by replacing deductions with tax
credits, which could deliver the same benefits to taxpayers in all tax brackets.

The effectiveness of a high marginal tax rate is also much reduced by its often being
applied at such high levels of income (expressed in shares of per capita GDP) that
little income is subject to these rates. In some developing countries, a taxpayer's
income must be hundreds of times the per capita income before it enters the highest
rate bracket.

Moreover, in some countries the top marginal personal income tax rate exceeds the
corporate income tax by a significant margin, providing strong incentives for
taxpayers to choose the corporate form of doing business for purely tax reasons.
Professionals and small entrepreneurs can easily siphon off profits through expense
deductions over time and escape the highest personal income tax permanently. A tax
delayed is a tax evaded. Good tax policy, therefore, ensures that the top marginal
personal income tax rate does not differ materially from the corporate income tax rate.

In addition to the problem of exemptions and deductions tending to narrow the tax
base and to negate effective progressivity, the personal income tax structure in many
developing countries is riddled with serious violations of the two basic principles of
good tax policy: symmetry and inclusiveness. (It goes without saying, of course, that
tax policy should also be guided by the general principles of neutrality, equity, and
simplicity.) The symmetry principle refers to the identical treatment for tax purposes
of gains and losses of any given source of income. If the gains are taxable, then the
losses should be deductible. The inclusiveness principle relates to capturing an
income stream in the tax net at some point along the path of that stream. For example,
if a payment.

Exempt from tax for a payee, then it should not be a deductible expense for the payer.
Violating these principles generally leads to distortions and inequities.

The tax treatment of financial income is problematic in all countries. Two issues
dealing with the taxation of interest and dividends in developing countries are
relevant:

● In many developing countries, interest income, if taxed at all, is taxed as a

final withholding tax at a rate substantially below both the top marginal
personal and corporate income tax rate. For taxpayers with mainly wage
income, this is an acceptable compromise between theoretical correctness and
practical Feasibility. For those with business income, however, the low tax
rate on interest income coupled with full deductibility of interest expenditure
implies that significant tax savings could be realized through fairly
straightforward arbitrage transactions. Hence it is important to target carefully
the application of final withholding on interest income: final withholding
should not be applied if the taxpayer has business income.

● The tax treatment of dividends raises the well-known double taxation issue.
For administrative simplicity, most developing countries would be well
advised either to exempt dividends from the personal income tax altogether, or

18
 to tax them at a relatively low rate, perhaps through a final withholding tax at
the same rate as that imposed on interest income.

1.10 CORPORATE INCOME TAX

Tax policy issues relating to corporate income tax are numerous and complex,
but particularly relevant for developing countries are the issues of multiple
rates based on sectoral differentiation and the incoherent design of the
depreciation system. Developing countries are more prone to having multiple
rates along sectoral lines (including the complete exemption from tax of certain
sectors, especially the parastatal sector) than industrial countries, possibly as a
legacy of past economic regimes that emphasized the state's role in resource
allocation. Such practices, however, are clearly detrimental to the proper
functioning of market forces (that is, the sectoral allocation of resources is
distorted by differences in tax rates). They are indefensible if a government's
commitment to a market economy is real. Unifying multiple corporate income
tax rates should thus be a priority.

Allowable depreciation of physical assets for tax purposes is an important

structural element in determining the cost of capital and the profitability of
investment. The most common shortcomings found in the depreciation systems
in developing countries include too many asset categories and depreciation
rates, excessively low depreciation rates, and a structure of depreciation rates
that is not in accordance with the relative obsolescence rates of different asset
categories. Rectifying these shortcomings should also receive a high priority in
tax policy deliberations in these countries.

In restructuring their depreciation systems, developing countries could well

benefit from certain guidelines:

● Classifying assets into three or four categories should be more than

sufficient—for example, grouping assets that last a long time, such as
buildings, at one end, and fast-depreciating assets, such as computers, at
the other with one or two categories of machinery and equipment in
between.

● Only one depreciation rate should be assigned to each category.

● Depreciation rates should generally be set higher than the actual

physical lives of the underlying assets to compensate for the lack of a
comprehensive inflation-compensating mechanism in most tax systems.

1.11 TYPES OF TAXES

(l) Proportional Tax (Flat Tax)

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A proportional tax is a tax whose burden is the same rate regardless of the income
earned by the household. For example under a proportional tax system, if the income
tax rate is 13%, then a household who earns $10,000 will pay 13%of the their income
in taxes, while a household who earns $10 million will also pay 13%of their
income as taxes.

(2) Progressive Tax

A progressive tax is a tax that exacts a higher percentage of income from higher
income households than from lower income households. The current income tax
system in the United States is a progressive tax. For example, under a progressive tax
system, a household that earns$10,000 would pay a 5% income tax while a household
that earns $10 million would have to pay a 35% income tax.

(3) Regressive Tax

A regressive tax means that higher income households pay less in taxes as a
percentage of their income than lower income families. Excise taxes and retail sales
taxes are examples of regressive taxes. Ian the context of the Financial crisis 2007-
2010, in August 2009, British Financial Services Authority chairman Lord Adair
Turner said in prospect magazine that he would be happy to consider a "tax on banks"
to prevent excessive bonus payments.

1.12 DEFINITION

(a) the term "Bangladesh" means the People's Republic of Bangladesh;

(b) the term "India" means the Republic of India;

(c) the terms "a Contracting State" and "the other Contracting State" mean
Bangladesh or India as the context requires;

(d) the term "tax" means Bangladesh tax or Indian tax, as the context requires;

(e) the term "person" includes an individual, a company and any other entity
which is treated as a taxable unit under the tax laws in force in the
respective Contracting States;

(f) the term "company" means any company, body corporate or any other
entity which is treated as a company under the tax laws of the respective
Contracting States;

(g) the terms "resident of a Contracting State" and "resident of the other
Contracting State" mean a person who is a resident of Bangladesh or a
person who is a resident of India, as the context requires;

(h) the terms "enterprise of a Contracting State" and "enterprise of the other
Contracting State" mean respectively an enterprise carried on by a resident
20
 of a Contracting State and an enterprise carried on by a resident of the other
Contracting State;

(i) the term "nationals" means all individuals possessing the nationality of the
respective Contracting States and also all legal persons, partnerships and
associations deriving their status as such from the law in force in the
respective Contracting States ;

(j) the term "competent authority" means in the case of Bangladesh, the
National Board of Revenue or their authorised representative and in the
case of India, the Central Government in the Ministry of Finance
(Department of Revenue) or their authorised representative;

(k) the term "international traffic" means any transport by a ship or aircraft
operated by an enterprise of a Contracting State, except when the ship or
aircraft is operated solely between places in the other Contracting State.

21
 CHAPTER 2: RESEARCH METHODOLOGY

It is a matter of general belief that taxes on income and wealth are of recent
origin but there is enough evidence to show that taxes on income in some form or the
other were levied even in primitive and ancient communities. The origin of the word
"Tax" is from "Taxation" which means an estimate. These were levied either on the
sale and purchase of merchandise or livestock and were collected in a haphazard
manner from time to time. As mentioned in his articles on ‘Study on proposed Goods
and Service Tax’ by Raj Kumar S. Adukia, the first known system of taxation was in
Ancient Egypt around3000 BC - 2800 BC in the first dynasty of the Old Kingdom.
Records from that time show that the pharaoh would conduct a biennial tour of the
kingdom, collecting tax revenues from the people.

Other records are granary receipts on limestone flakes and papyrus. Early
taxation is also described in the Bible. In Genesis (chapter 47, verse 24- the New
International Version), it states "But when the crop comes in, give a fifth of it to
Pharaoh. The other four-fifths you may keep as seed for the fields and as food for
your selves and your households and your children." Joseph was telling the people of
Egypt how to divide their crop, providing a portion to the Pharaoh. A share
(20percent) of the crop was the tax. To the Athenians in Greece, war was a lifestyle,
and a pricey one at that. As such, Athenians taxed their citizens for war costs with a
tax they called "eisphora."The most historic factor of this tax was that it exempted no
one, which many consider the first democratic taxation system, as after the wars the
money was often refunded to the people.

In 2000 year ago, in Greece, Germany and Roman Empires, the taxes were
also levied sometime on the basis of turnover and sometime on occupation. In 1188,
In Northern England, taxes were levied on land and immovable property. Later on, the
poll taxes and indirect taxes were introduced, known as ‘Ancient Customs’. The
Ancient customs were the duties on the woo; leather and hides. The purpose of all
these taxes were to meet the needs of military and civil expenditure of the
Government as well as to meet common needs of the citizens like maintenance of
roads, administration of justice and such other function of state.

The primary purpose of taxation is to raise revenue to meet huge public expenditure.
Most governmental activities must be financed by taxation. But it is not the only goal.
In other words, taxation policy has some non-revenue objectives.

22
Truly speaking, in the modern world, taxation is used as an instrument of economic
policy. It affects the total volume of production, consumption, investment, choice of
industrial location and techniques, balance of payments, distribution of income, etc.

One of the important objectives of taxation is economic development. Economic

development of any country is largely conditioned by the growth of capital formation.
It is said that capital formation is the kingpin of economic development. But LDCs
usually suffer from the shortage of capital.

To overcome the scarcity of capital, governments of these countries mobilize

resources so that a rapid capital accumulation takes place. To step up both public and
private investment, government taps tax revenues. Through proper tax planning, the
ratio of savings to national income can be raised.

By raising the existing rate of taxes or by imposing new taxes, the process of capital
formation can be made smooth. One of the important elements of economic
development is the raising of savings- income ratio which can be effectively raised
through taxation policy.

However, proper care has to be taken, regarding investment. If financial resources or

investments are channelized in the unproductive sectors of the economy the economic
development may be jeopardized, even if savings and investment rates are increased.
Thus, the tax policy has to be employed in such a way that investment occurs in the
productive sectors of the economy, including the infrastructural sectors.

Second objective is the full employment. Since the level of employment depends on
effective demand, a country desirous of achieving the goal of full employment must
cut down the rate of taxes. Consequently, disposable income will rise and, hence,
demand for goods and services will rise. Increased demand will stimulate investment
leading to a rise in income and employment through the multiplier mechanism.

Thirdly, taxation can be used to ensure price stability—a short run objective of
taxation. Taxes are regarded as an effective means of controlling inflation. By raising
the rate of direct taxes, private spending can be controlled. Naturally, the pressure on
the commodity market is reduced.

But indirect taxes imposed on commodities fuel inflationary tendencies. High

commodity prices, on the one hand, discourage consumption and, on the other hand,
encourage saving. Opposite effect will occur when taxes are lowered down during
deflation.

The research would be descriptive, empirical as well as analytical. The design would
be based on the objectives of the study and the hypothesis of the study. Data in
relation to provisions for taxing of financial services would be collected from the
existing law. The data collected through the interviews and questionnaires will be
subject to further statistical methods of analysis.

Fourthly, control of cyclical fluctuations—periods of boom and depression—is

considered to be another objective of taxation. During depression, taxes are lowered
down while during boom taxes are increased so that cyclical fluctuations are tamed.

23
Fifthly, taxes like custom duties are also used to control imports of certain goods with
the objective of reducing the intensity of balance of payments difficulties and
encouraging domestic production of import substitutes.

Finally, another extra-revenue or non-revenue objective of taxation is the reduction of

inequalities in income and wealth. This can be done by taxing the rich at higher rate
than the poor or by introducing a system of progressive taxation.

The present dissertation is a library study based on interpretation of published

secondary data. Necessary secondary data is collected from the libraries ofthe
following institutions. 1. Barr. Balasaheb Khardekar Library, Shivaji University,
Kolhapur. 2. Dhananjayrao Gadgil Library, Gokhale Institute of Politics and
Economics, Pune. Necessary secondary data is collected from the following sources.
1. Annual budget documents of Government of India for the relevant years. 2.
Economic Survey published by the Ministry of Finance, Government of India, New
Delhi. 3. Reserve Bank ofIndia Annual Currency and Finance Reports. Secondary
data collected from the above sources is tabulated and interpreted with necessary
statistical tools. Compound growth rate and ratio analysis are used. Formula used to
calculate compound growth rate is as follows.

2.1 OBJECTIVES OF STUDY

The main purpose of this study is to:

1. To examine whether government’s policies on income tax affect the revenue

of corporations.

2. To examine the relevance of tax regulation on the development of companies’

in developing economies

3. To ascertain the impact of the company income tax revenue on the

development of the India and Bangladesh economy.

4. To know that what impact tax and personal income tax do to the nation’s
economy.

5. How taxation works and what role does it play companies growth.

2.2 SCOPE OF STUDY

This study is to effectively make an in-depth study on the impact of company income
tax revenue on developing economies using India and Bangladesh economy as
reference point. This study will reveal the impact of taxation on revenue of
organizations and as well focus on taxation policies and variances that occur among
selected developing countries.

24
ones. Fifth, the revenue cost of the tax holiday to the budget is seldom transparent,
unless enterprises enjoying the holiday are required to file tax forms. In this case, the
government must spend resources on tax administration that yields no revenue and the
enterprise loses the advantage of not having to deal with tax authorities.

Compared with tax holidays, tax credits and investment allowances have a number of
advantages. They are much better targeted than tax holidays for promoting particular
types of investment and their revenue cost is much more transparent and easier to
control. A simple and effective way of administering a tax credit system is to
determine the amount of the credit to a qualified enterprise and to "deposit" this
amount into a special tax account in the form of a bookkeeping entry. In all other
respects the enterprise will be treated like an ordinary taxpayer, subject to all
applicable tax regulations, including the obligation to file tax returns. The only
difference would be that its income tax liabilities

Would be paid from credits "withdrawn" from its tax account. In this way information
is always available on the budget revenue forgone and on the amount of tax credits
still available to the enterprise. A system of investment allowances could be
administered in much the same way as tax credits, achieving similar results.

There are two notable weaknesses associated with tax credits and investment
allowances. First, these incentives tend to distort choice in favor of short-lived capital
assets since further credit or allowance becomes available each time an asset is
replaced. Second, qualified enterprises may attempt to abuse the system by selling and
purchasing the same assets to claim multiple credits or allowances or by Of all the
forms of tax incentives, tax holidays (exemptions from paying tax for a certain period
of time) are the most popular among developing countries. Though simple to
administer, they have numerous shortcomings.

First, by exempting profits irrespective of their amount, tax holidays tend to benefit an
investor who expects high profits and would have made the investment even if this
incentive were not offered. Second, tax holidays provide a strong incentive for tax
avoidance, as taxed enterprises can enter into economic relationships with exempt
ones to shift their profits through transfer pricing (for example, overpaying for goods
from the other enterprise and receiving a kickback). Third, the duration of the tax
holiday is prone to abuse and extension by investors through creative redesignation of
existing investment as new investment (for example, closing down and restarting the
same project under a different name but with the same ownership). Fourth, time-
bound tax holidays tend to attract short-run projects, which are typically not as
beneficial to the economy as longer-term.

While VAT has been adopted in most developing countries, it frequently suffers from
being incomplete in one aspect or another. Many important sectors, most notably
services and the wholesale and retail sector, have been left out of the VAT net, or the
credit mechanism is excessively restrictive (that is, there are denials or delays in
providing proper credits for VAT on inputs), especially when it comes to capital
goods. As these features allow a substantial degree of cascading (increasing the tax
burden for the final user), they reduce the benefits from introducing the VAT in the
first place. Rectifying such limitations in the VAT design and administration should
be given priority in developing countries.

25
Many developing countries (like many OECD countries) have adopted two or more
VAT rates. Multiple rates are politically attractive because they ostensibly—though
not necessarily effectively—serve an equity objective, but the administrative price for
addressing equity concerns through multiple VAT rates may be higher in developing
than in industrial countries. The cost of a multiple-rate system should be carefully
scrutinized.

The most notable shortcoming of the excise systems found in many developing
countries is their inappropriately broad coverage of products—often for revenue
reasons. As is well known, the economic rationale for imposing excises is very
different from that for imposing a general consumption tax. While the latter should be
broadly based to maximize revenue with minimum distortion, the former should be
highly selective, narrowly targeting a few goods mainly on the grounds that their
consumption entails negative externalities on society (in other words, society at large
pays a price for their use by individuals). The goods typically deemed to be excisable
(tobacco, alcohol, petroleum products, and motor vehicles, for example) are few and
usually inelastic in demand. A good excise system is invariably one that generates
revenue (as a by-product) from a narrow base and with relatively low administrative
costs.

2.3 SIGNIFICANCE OF STUDY

In this project work, efforts will be made to examine companies income tax, and
organization’s efforts at fulfilling their financial obligations. This analysis will throw
more light on the adequacy of revenue generation of companies and taxes imposed on
such income generation.

However, this study will be of great significance to shareholders, investors and

management of companies as it reveals the openness of standards of financial
reporting practices. It as well enable companies capitalizes on their gains while
focusing on areas of comparative advantage.

The mechanism by which tax incentives can be triggered can be either automatic or
discretionary. An automatic triggering mechanism allows the investment to receive
the incentives automatically once it satisfies clearly specified objective qualifying
criteria, such as a minimum amount of investment in certain sectors of the economy.
The relevant authorities have merely to ensure that the qualifying criteria are met. A
discretionary triggering mechanism involves approving or denying an application for
incentives on the basis of subjective value judgment by the incentive-granting
authorities, without formally stated qualifying criteria. A discretionary triggering
mechanism may be seen by the authorities as preferable to an automatic one because
it provides them with more flexibility. This advantage is likely to be outweighed,
however, by a variety of problems associated with discretion, most notably a lack of
transparency in the decision-making process, which could in turn encourage
corruption and rent-seeking activities. If the concern about having an automatic
triggering.

26
Mechanism is the loss of discretion in handling exceptional cases, the preferred
safeguard would be to formulate the qualifying criteria in as narrow and specific a
fashion as possible, so that incentives are granted only to investments meeting the
highest objective and quantifiable standard of merit. On balance, it is advisable to
minimize the discretionary element in the incentive-granting process.
The cost-effectiveness of providing tax incentives to promote investment is generally
questionable. The best strategy for sustained investment promotion is to provide a
stable and transparent legal and regulatory framework and to put in place a tax system
in line with international norms. Some objectives, such as those that encourage
regional development, are more justifiable than others as a basis for granting tax
incentives. Not all tax incentives are equally effective. Accelerated depreciation has
the most comparative merits, followed by investment allowances or tax credits. Tax
holidays and investment subsidies are among the least meritorious. As a general rule,
indirect tax incentives should.

2.4 LIMITATION OF STUDY

In the process of writing this project, the researcher encountered some limitations.
First, the researcher was constrained by time, the insufficiency of finance made the
researcher almost tired of the project work. This went further to compound the
researcher’s problem, since they were using the limited resources available for them
to also work on the project.

Another constraint encountered by the researcher was scarcity of information. The

relevant information from the CBN and other relevant bodies in most cases are not up
to date. This also contributes to the delay of information been required to enhance the
research.

Acting as a purchasing agent for enterprises not qualified to receive the incentive.
Safeguards must be built into the system to minimize these dangers.

Providing tax incentives in the form of accelerated depreciation has the least of the
shortcomings associated with tax holidays and all of the virtues of tax credits and
investment allowances—and overcomes the latter's weakness to boot. Since merely
accelerating the depreciation of an asset does not increase the depreciation of the asset
beyond its original cost, little distortion in favor of short-term assets is generated.
Moreover, accelerated depreciation has two additional merits. First, it is generally
least costly, as the forgone revenue (relative to no acceleration) in the early years is at
least partially recovered in subsequent years of the asset's life. Second, if the
acceleration is made available only temporarily, it could induce a significant short-run
surge in investment.

While investment subsidies (providing public funds for private investments) have the
advantage of easy targeting, they are generally quite problematic. They involve out-
of-pocket expenditure by the government up front and they benefit nonviable
investments as much as profitable ones. Hence, the use of investment subsidies is
seldom advisable.

27
Indirect tax incentives, such as exempting raw materials and capital goods from the
VAT, are prone to abuse and are of doubtful utility. Exempting from import tariffs
raw materials and capital goods used to produce exports is somewhat more justifiable.
The difficulty with this exemption lies, of course, in ensuring that the exempted
purchases will in fact be used as intended by the incentive. Establishing

export production zones whose perimeters are secured by customs controls is a useful,
though not entirely foolproof, remedy for this abuse.

be avoided, and discretion in granting incentives should be minimized. While granting

tax incentives to promote investment is common in countries around the world,
evidence suggests that their effectiveness in attracting incremental investments—
above and beyond the level that would have been reached had no incentives been
granted—is often questionable. As tax incentives can be abused by existing
enterprises disguised as new ones through nominal reorganization, their revenue costs
can be high. Moreover, foreign investors, the primary target of most tax incentives,
base their decision to enter a country on a whole host of factors (such as natural
resources, political stability, transparent regulatory systems, infrastructure, a skilled
workforce), of which tax incentives are frequently far from being the most important
one. Tax incentives could also be of questionable value to a foreign investor because
the true beneficiary of the incentives may not be the investor, but rather the treasury
of his home country. This can come about when any income spared from taxation in
the host country is taxed by the investor's home country.

Tax incentives can be justified if they address some form of market failure, most
notably those involving externalities (economic consequences beyond the specific
beneficiary of the tax incentive). For example, incentives targeted to promote high-
technology industries that promise to confer significant positive externalities on the
rest of the economy are usually legitimate. By far the most compelling case for
granting targeted incentives is for meeting regional development needs of these
countries. Nevertheless, not all incentives are equally suited for achieving such
objectives and some are less cost-effective than others. Unfortunately, the most
prevalent forms of incentives found in developing countries tend to be the least
meritorious.

2.5 SOURCES OF DATA COLLECTION

This study on the effect of taxation on economic growth employs secondary data
obtained from published sources, that is, second-hand type of information obtained
from secondary sources from 1996 to 2019. The variables of interest selected in this
study based on the availability and reliability of data in which five variables (income
tax, taxes on domestic goods and services, FDI, domestic investment (DI), inflation and
real GDP) are being included. The data were obtained from Tanzania National Bureau
of Statistics (NBS) and Tanzania Revenue Authority (TR A).

Developing countries attempting to become fully integrated in the world

economy will probably need a higher tax level if they are to pursue a

28
government role closer to that of industrial countries, which, on average, enjoy
twice the tax revenue. Developing countries will need to reduce sharply their
reliance on foreign trade taxes, without at the same time creating economic
disincentives, especially in raising more revenue from personal income tax. To
meet these challenges, policymakers in these countries will have to get their
policy priorities right and have the political will to implement the necessary
reforms. Tax administrations must be strengthened to accompany the needed
policy changes.

As trade barriers come down and capital becomes more mobile, the formulation
of sound tax policy poses significant challenges for developing countries. The
need to replace foreign trade taxes with domestic taxes will be accompanied by
growing concerns about profit diversion by foreign investors,

Researchers for BPS PEAKS stated that the core purpose of taxation is revenue
mobilization, providing resources for National Budgets, and forming an important
part of macro economic management. They said economic theory has focused on the
need to 'optimize' the system through balancing efficiency and equity, understanding
the impacts on production, and consumption as well as distribution, redistribution, and
welfare. They state that taxes and tax reliefs have also been used as a tool for
behavioural change, to influence investment decisions, labour supply, consumption
patterns, and positive and negative economic spill-over(externalities), and ultimately,
the promotion of economic growth and development.

The tax system and its administration also play an important role in state-building
and governance, as a principal form of ’social contract' between the state and citizens
who can, as taxpayers, exert accountability on the state as a consequence. The
researchers wrote that domestic revenue forms an important part of a
developing country's public financing as it is more stable and predictable than
Overseas Development Assistance and necessary for a country to be self-sufficient.
They found that domestic revenue flows are, on average, already much larger
than ODA, with aid worth less than 10% of collected taxes in Africa as a whole.

2.6 ECONOMIC GROWTH

Economic growth is generally defined as the increase in country’s productive capacity.

In this study, the growth rate of GDP per capita, at constant prices, is used to measure
economic growth and is chosen because per capita income is easy to understand and
because it says something meaningful about the economic health of the state. Higher
growth in income per capita means a state is growing more affluent on average, lower
growth or decline means a state’s residents are getting poorer.

However, in a quarter of African countries Overseas Development Assistance does

exceed tax collection, with these more likely to be non-resource-rich countries, This
suggests countries making most progress replacing aid with tax revenue tend to be
those benefiting disproportionately from rising prices of energy and commodities.

29
The author found tax revenue as a percentage of GDP varying greatly around a global
average of19%. This data also indicates countries with higher GDP tend to have
higher tax to GDP ratios, demonstrating that higher income is associated with more
than proportionately higher tax revenue.

Poorer countries have indeed shifted towards more use of the value-added tax in
recent years, in part based on the advice and assistance of international organizations.
But otherwise the puzzling differences remain. This leaves unanswered why poorer
countries so systematically choose the wrong policies, and why these wrong policies
have remained so stable over time. Perhaps political economy problems are more
severe among developing countries, and some important domestic constituency gains
from the policies that standard models find perverse. Yet these puzzling policies are
found under many different types of governments, drawing their support from many
different constituencies. (Coelho, Isaias, and Harris, 2001).

Perhaps poorer countries lack the best enforcement methods, e.g. based on modern
information technology. Certainly computer technology helps pool information from
different sources. Bird (1999) argues, however, that the key problem is acquiring
reliable information, not processing it. In considering problems associated with
income tax of developing economies, problems statements like the following arises:

1. Does government policy on company income tax affect the revenue of

corporations in developing countries?

2. Of what relevance is tax regulation on the development of companies’ in

developing economies?

Does effective income tax helps in the building strong economies?

Inflation rate is the rate at which the average price level of a basket of selected goods
and services in an economy increases over time. It is the persistence increase in the
general price level where a unit of currency effectively buys less than it did in previous
periods. Annual inflation rate is being used in this article as provided by National
Bureau of Statistics (NBS) in Tanzania.

Reducing import tariffs as part of an overall program of trade liberalization is a major

policy challenge currently facing many developing countries. Two concerns should be
carefully addressed. First, tariff reduction should not lead to unintended changes in
the relative rates of effective protection across sectors. One simple way of ensuring
that unintended consequences do not occur would be to reduce all nominal tariff rates
by the same proportion whenever such rates need to be changed.

Second, nominal tariff reductions are likely to entail short-term revenue loss. This loss
can be avoided through a clear-cut strategy in which separate compensatory measures
are considered in sequence: first reducing the scope of tariff exemptions in the
existing system, then compensating for the tariff reductions on excisable imports by a
commensurate increase in their excise rates.

The concept of a negative income tax was that if an income were to drop below a
certain minimum level, a negative tax would be levied, which meant that the tax

30
system would pay out cash. This negative tax would be reduced when someone again
earned an income above the minimum level. The experiments were carried out from
1968 through 1972 and involved a sample of more than 1200 households. These
households were randomly divided into several experimental groups, which differed
in the level of guaranteed income and in the reduction rate of negative taxes when
earning income above the minimum level. The experiments had to test whether or not
this system of a negative income tax created an incentive to work was tested. These
experiments were the first large-scale attempt to test a policy by employing
randomized controlled experimentation.

Income tax is defined as the taxes paid on the income earned by individuals and
entities such as companies or partnerships. The Indian taxation system is
defined as progressive, which means that the higher the amount of income you
earn; the higher is the tax you are liable to pay.

There are several tax brackets, which increase in accordance with increasing income.
However, the taxation system for salaried employees differs quite significantly from
the taxes levied on self-employed individuals or those running their own personal
business.

If you have ever wondered what is negative income tax, and whether it applies to you,
you should continue reading below. Negative income tax comes into mention in a
year when you have suffered losses, and not earned any income. This is applicable
only to self-employed individuals, since if salaried individuals do not earn any income
in a particular year, they fall into the 0 tax bracket which implies they are not liable to
pay any taxes.

However, income can stem not only from one’s salary but also through their
investments, whether on property or equity or even metals such as gold. If you are
concerned about your investment instruments and the returns you are earning on
them, you should consider investing in the Invest4G Plan available on Canara HSBC
Life Insurance. This Unit Linked Insurance Plan (ULIP) not only offers both coverage
and returns, but also enables you to invest across 7 different funds with the option to
choose from 4 different investment strategies.

The Income Tax Act, 1961 lists different provisions, deductions and exemptions
applicable to individuals and entities who are liable to pay taxes in India. Section
139(3) of the Act refers to the negative income tax provisions, and states that
companies, firms and self-employed persons are required to file income tax returns
(ITR) even if losses have been suffered by them in the year under purview.

Filing an ITR in the year you suffer losses allows you to offset those losses in the
future years. This can be done by adjusting profits in the following years with losses
in the current year, and furthermore, this ensures that your profits in the following
year do not significantly increase your tax burden.

The tax is important source of revenue for the government. However, its growth should
be with justice. While collecting these taxes, collection of Indirect tax is easier than the
collection of Direct tax. As India entered the WTO regime, there is constraint on the
custom and excise duty, which collection is reducing. The report in regards to tax stated
“One of the objectives of taxation is growth with justice. Mopping up resources for the

31
planned development is a big problem for the developing economies. While both direct
and indirect taxation sub-serve, inter alia, the purpose of raising resources, indirect
taxation is resorted to increasingly as a measure of good economics and politics,
because of the hidden incidence of indirect taxation, as compared to direct taxes. In
developed economies, consumption of goods and services is treated and taxed alike.

As already stated, indirect taxes are hidden in the cost of goods and services, and when
compared to direct taxes, it is easier to collect indirect taxes and the cost of collection is
comparable to the cost of collection of direct taxes. Against the backdrop of constant
resource constraints, it is imperative for any government to look for various viable
alternatives. This has been accentuated further with the declining share of customs and
excise duties due to the streamlining of duty structures, consequent upon India's entry
into WTO regime.”

The report stated that the power to levy a tax on services is not mentioned either in the
union list or in the state list in the VII schedule of the constitution. by virtue of Entry 97
in the Union List which gives power to the Center for levy and collection of "any tax
not mentioned in either of those lists.

The Service Tax was an offshoot of the recommendations made by Dr.Raja Chelliah
Committee, way back in the early 1990s. The Committee observed that the indirect tax
at the Central level should be broadly neutral in relation to production and consumption
of goods and should, in course of time cover commodities and services. It is further
stated that the 2001-02 Union Budget expanded the scope of this levy to cover more
services. These sporadic efforts of the central government remain far below the revenue
potential of this sector. This is partly due to the administrative complexity and
feasibility consideration of taxing the vast range of services, which are primarily local
in nature.

32
 CHAPTER 3. REVIEW OF LITERATURE

Taxation is a major source of revenue for the Government. It is also a means of

economic transformation and socio-economic cohesion. Taxation policy of a country
has to play a vital role, particularly, by utilizing this weapon to the best advantage of
the national economy. Specially, in a developing country like India, taxation has been
used to promote multiple objectives such as to increase the rate of domestic savings,
reduce inequalities of income and wealth and to maintain price stability. Revenue
from taxes has provided a big support to the Government finances. Revenue from
direct taxes is increasing day by day. Direct taxes are preferred to indirect taxes
because they are more equitable, administratively effective and can be related to
individual’s ability to pay. Income-tax is the oldest tax in the direct taxes and has an
important place in the direct tax revenue. Besides, agricultural income-tax and
professional tax are also very important in the matter of economic stabilization. So,
these taxes also play an important role in Indian direct taxes. This paper is an attempt
to analyze and interpret the importance of taxation, especially direct taxation in India.

In this paper, we review tax research in accounting as well as tax research in

economics and finance to the extent that it is related to or is affected by research in
accounting. Shackelford and Shevlin (2001) provide a careful and thorough review of
empirical tax research in accounting in the prior Journal of Accounting and
Economics review volume. Shackelford and Shevlin limit their review to research
published in accounting outlets and describe the development of the relatively young
archival, microeconomic-based income tax literature that arose from the Scholes and
Wolfson framework. In his discussion of the review, Maydew (2001) emphasizes the
need for tax researchers in accounting to think more broadly and to incorporate more
theory and evidence from economics and finance. We agree. Tax research has a long
history in many disciplines; this fact cannot be ignored. Our goal in this paper is to
integrate the theoretical and empirical tax research from accounting, economics, and
finance, to summarize what is known and unknown, and to offer suggestions for
future research.

The multidisciplinary nature of tax research is what makes tax research exciting (yes,
exciting), yet difficult. Tax research can be difficult not only because one has to
follow tax studies in accounting, finance, economics, and law (through academic
institutions, governmental agencies, and policy think tanks), but also because different
disciplines often use different languages and have different perspectives.1 For

33
example, economists generally focus on tax compliance, tax incidence (such as who
bears the corporate tax), investment and economic growth effects (such as how taxes
affect investment), and optimal tax policy (for example, whether a consumption or an
income tax is better at minimizing distortions). In finance, taxes are viewed as a
market imperfection in a Miller and Modigliani type of world. This view leads to
studies on whether taxes affect firm value (e.g., whether dividend taxes affect
expected returns), firm financial policy decisions (e.g., whether taxes affect a firm’s
use of leverage), and investor portfolio decisions (e.g., the role of international tax
considerations in portfolio allocation).

Tax research in accounting examines some of the same questions as tax research in
economics and finance. In addition, those working in accounting utilize specific
knowledge of financial accounting rules and an understanding of the institutional
details of tax and financial reporting (i.e., our comparative advantages) to identify and
examine research questions. For example, divergent reporting incentives for tax and
financial accounting purposes lead to empirical studies of the tradeoffs between tax
costs and financial accounting earnings. One outcome of this research is the ability to
put bounds on managers’ value of incremental accounting earnings because we can
measure the cash tax cost incurred to alter the measure of the earnings. Conversely, by
understanding how managers balance tax incentives with external reporting
incentives, the same research can provide evidence on the effectiveness of tax policy.
Tax accounting researchers also leverage off another comparative advantage, an
understanding of information contained in the income tax disclosures in the financial
statements, to examine whether the tax accounts provide incremental information
about current and future earnings and firm value. In addition, we also use our
understanding of tax return data and the income tax data in the financial reports to
derive measures of firms’ tax avoidance activities and to address important questions
about the determinants and consequences of tax avoidance.

Accountants also have a comparative advantage in studying information asymmetry

problems (e.g., asymmetry between the firm and the state and between shareholders
and managers) where measurement and information are core issues (Slemrod, 2005).
Although we discuss research at the intersection of accounting, finance, and
economics, we do not advocate that accounting researchers broaden the research
scope in ways that clearly do not reflect a comparative advantage (e.g., corporate tax
incidence or the optimality of a consumption tax). Rather, we advocate that
accounting researchers incorporate and/or extend the theories and evidence from
economics and finance that are relevant for tax research in accounting. Further, we
encourage accounting researchers to increasingly leverage our comparative advantage
to examine “real” corporate decisions, issues important in tax policy debates, and the
incentive structures involved in corporate tax reporting. To focus the paper and
maintain a manageable length, we limit the review to certain areas of tax research.

We focus on tax issues facing businesses because this is where the majority of tax
research in accounting is done and because research on businesses overlaps with the
scope of most other areas of accounting research. Even then, we are forced to retain
only certain areas. First, we discuss the corporate reporting of income taxes in the
financial statements and the information tax disclosures provide about current and
future earnings. In this section, we also discuss research on the policy proposal to
conform book and tax income measurement and review the empirical evidence on the

34
effect of such conformity on the informativeness of accounting earnings. Second, we
discuss the recent theoretical models of corporate tax avoidance, evaluate the
empirical measures of tax avoidance, and summarize the recent evidence on the
causes and consequences of corporate tax avoidance. Third, we address the
importance of taxes on business decisions by reviewing the literature on the effect of
taxes on business investment, corporate capital structure (including estimation of the
marginal tax rate), organizational form, and other decisions.

VD Lall1982, in his paper tried to find out the economic implication of direct taxes on
individual and business. His study exposed that both average rate of tax and marginal
rate of tax have bearing on mind set of the tax paper so there is need to give
professional look to the present tax system of the country. Peter et al ,2001
investigated that taxation in its various form affect the ability and willingness of a
individual to work , save and invest but the effect gets vary according to the base of
tax, rate of tax and level of tax burden.

They have taken empirical data from 2008-09. The authors have compared on
the basis of tax- gdp ratio, cost of collection and compliance, composition of
direct tax revenue in both the periods, number of assesses, share of direct tax and
indirect tax in total tax revenue, growth rate of both direct and indirect tax of state
and centre, buoyancy direct tax, indirect tax and total tax revenue of said periods.
Tax-gdp ratio of India with other selected countries is also compared. They have
concluded that substantial changes have taken place in the overall tax structure and
its composition in India during the post-reform period. Tax –gdp ratio of India is
still a concern as compared to other countries having similar gdp.

Ankita 2009, in her study propounded that a small attempt to rationalize the personal
income tax structure can bring benefitsto the govt as well as to the people in the form
of( i)increase in the number of assesses (ii) more compliance to the tax laws (iii) high
rate of GDP and (iv) better well being of the individuals. Nirmala dorasamy,2011
provided an overview of personal income tax administration reforms as a mechanism
to enhance collection of revenue on the one hand and availability of more pool of
fund for welfare of the public on the other. The author found that a comprehensive tax
policy encourage the individual to compliance tax law otherwise they adopt unfair
mean to lessen their tax burden.

Tax has been defined by various authorities and professionals in various ways.
Conceptually, tax can be defined or seen as a compulsory transfer of resources from
the private to the public sector (Uremadu, 2000). According to Lymer and Oats
(2009) tax is defined as a compulsory levy, imposed by government or other tax
raising body, on income, expenditure, or capital assets for which the taxpayer receives
nothing specific in return.

Researchers have often used the term "non-compliance" to characterise the intentional
or unintentional failure of taxpayers to pay their taxes correctly, and the term will be
used in this way in this study.

Unintentional non-compliance is the failure of a taxpayer, or of an intermediary acting

on behalf of the taxpayer (in this case the employer), to remit the proper amount of
tax to the authorities, perhaps on account of the complexity or contradictions in the
tax legislation or tax administration procedures (Kesselman, 1994:62-84). It may arise

35
from inadequate effort by the taxpayer or intermediary to ascertain its obligations. It
may also stem from the complexity of tax provisions and the difficulty of applying
them to the more complex situations of the real world. On the other hand, intentional
non-compliance can be divided into two types of activities: Tax evasion and Tax
avoidance.

Shackelford and Shevlin (2001) provide a careful and thorough review of empirical
tax research in accounting in the prior Journal of Accounting and Economics review
volume. Shackelford and Shevlin limit their review to research published in
accounting outlets and describe the development of the relatively young archival,
microeconomic-based income tax literature that arose from the Scholes and Wolfson
framework. In his discussion of the review, Maydew (2001) emphasizes the need for
tax researchers in accounting to think more broadly and to incorporate more theory
and evidence from economics and finance. We agree. Tax research has a long history
in many disciplines; this fact cannot be ignored. Our goal in this paper is to integrate
the theoretical and empirical tax research from accounting, economics, and finance, to
summarize what is known and unknown, and to offer suggestions for future research.

Taxes potentially affect many “real” corporate decisions but their order of importance
is still an open question. We review the literature on the tax effects in such decisions
and focus, in particular, on the interactions and tradeoffs between tax and financial
reporting incentives for these real decisions. Shackelford and Shevlin (2001)
summarize that the field has much evidence that under certain conditions, such as
high debt levels, firms will trade off taxes for higher accounting earnings when
making reporting decisions and accounting method choices. Since Shackelford and
Shevlin, research has provided evidence that even firms that fraudulently report
accounting earnings will at times pay taxes on those earnings, thus sacrificing cash
flow to alter a reported accounting number (Erickson, et al., 2004).

Gupta, Lahiri and Mookharjee (1995) made an empirical analysis on income

tax compliance in India from 1965-55 to 1992-93. They found that low tax rates,
plethora of exemptions significantly affect the revenue collection. The loop holes
of tax structure contributed a lot for slow and low tax compliance. They have also
identified the negative effect of declining assessment intensity. They have quoted
that best practice of enforcement, assessment and tax structure policy could have
yielded at most a 90 percent revenue increase leading India’s income tax
performance below the average of countries with similar GDP per capita. This
study has been carried out by taking regression equation on compliance and
income tax revenue with variables like income base, inflation rate, vector of tax
structure, vector of enforcement variable and vector of dummy variable for other
policy measures. It is concluded that contrary to the upward trend in real income
tax revenue during the study period, tax compliance appears to be declined
appreciably.

In addition empirical results shows that increased average tax rates and
exemption limit appear to have reduced compliance and revenues of the country.
Pillarisetti (1995) made a comparative study between India and Latin American
countries. The author annotates that prevalence of extreme high rate of tax over
several years resulted in institutionalised corruption and tax evasion in India in
1980s and 1990s. The author also added Indian direct tax reform failed to
neutralise non compliance and tax evasion. India’s approximately 50% legal

36
reportable income is untaxed. This theoretical paper also glossed up the sectoral
equity issues. India’s highly progressive tax structure can extract tax revenue from
organised sector leaving informal sector which becomes more vulnerable
widespread tax evasion. This creates inequality in tax system across the organised
and informal sector. It is pointed out that a fundamental issue in a tax system
is “ability to pay.” The author surprised the non inclusion of this economic well
being issue of tax payer in direct tax reform measure.

Sarkar (1997) dealt with corporate income and incidence of corporate taxation. The
paper critiqued the responsiveness of corporate tax to corporate income in India
with a view to assess the justification of the imposition of minimum
alternative tax. Tax buoyancy is calculated as the percentage change in the tax
revenues over the percentage change of Income.

Sharma (1997) highlighted different issues and options of corporate tax policy of
India focussing Minimum Alternative Tax (MAT) and Alternative Minimum Tax
(AMT). This theoretical paper also canvassed the revenue potential of MAT and
AMT. A sample of 4352 profit making companies was taken from CMIE data base
to dissect revenue raising capacity of MAT. It is witnessed that government would
collect net additional revenue of 2625 crores of rupees from this measure (MAT)
from 3178 zero tax companies 839 companies having tax incidence below 12.9
percent. It is also evinced that companies would save 54.8 crores of rupees due to
reduction in surcharge from 15% to 7.5% in 1996-97 budgets. The author also
compared tax rates of India with other countries.

The author concluded as “it is also equally desirable to strike a balance between the
high rates of depreciation allowed under the Income Tax Act and low rates of
depreciation admissible under the Companies Act and fix a common general rate of
depreciation at 20 per cent with further harmonisation of the depreciation rates
admissible in respect of specific blocks of assets and reduction of corporate tax
rate on domestic companies from 40 percent to 35 per cent, together with reduction
in tax rate on the foreign companies from 55 per cent to 45 per cent, would not
only induce better tax compliance but also have a favourable impact on
industrial activity and investment as also on the capital market”.

The share of direct tax is very less as compared to indirect tax despite several
reforms made in direct tax regime. They have quoted that the growth of direct taxes
has been very volatile over the years and tax buoyancy has also been fluctuating.
The central government revenue deficit as percentage of GDP has increased from
1.9% to 3.2% from pre-reform period (Period 1: 1980-81 to 1991-92) to post-reform
period (Period 2: 1992-93 to 2007-08). Slashing down of tax rate, abundant
deductions and exemptions are the sole reason for s This research work found that
direct tax elasticity is 1.62 percent, elasticity of indirect tax is 0.89 percent and gross
tax elasticity is 1.20 percent. The author opined that “Tax Elasticity of Direct tax is
high at 1.62 compared to other taxes and thus showing that change in taxes has been
higher than the changes in tax base and thus showing that more and more people
from the tax base are paying more taxes. This is a healthy sign and can lead to
lowering of effective tax rate with time” low growth rate of direct taxes which
ultimately leads to the increased revenue deficit.

37
G. Garg, (2014) analysed the impact of TAX on Indian tax scenario. He tried to
highlight the objectives of the proposed TAX plan along with the possible challenges
and opportunity that TAX brings. He concluded that TAX is the most logical steps
towards the comprehensive indirect tax reform in our country since independence.
TAX is leviable on all supply of goods and provision of services as well combination
thereof. All sectors of economy i.e the industry, business including Govt. departments
and service sector shall have to bear impact of TAX. All sections of economy viz.,
big, medium, small scale units, intermediaries, importers, exporters, traders,
professionals and consumers shall be directly affected by TAX. One of the biggest
taxation reforms in India – the Goods and Service Tax (TAX) is all set to integrate
State economies and boost overall growth. TAX will create a single, unified Indian
market to make the economy stronger. Experts say that TAX is likely to improve tax
collections and Boost India’s economic development by breaking tax barriers between
States and integrating India through a uniform tax rate. Under TAX, the taxation
burden will be divided equitably between manufacturing and services, through a
lower tax rate by increasing the tax base and minimizing exemptions.

Pinki et al., (2014) the authors in the paper have explored the concept of TAX, the
need to introduce it in India, the hurdles in introducing it in India and suggestions to
overcome the same. The paper also discusses the benefits of introducing TAX at the
earliest. The authors have discussed the options to introduce the dual TAX in India
which could be Concurrent Dual TAX, National TAX or State TAX. Under the
concurrent dual TAX the better option was the one where TAX is applied on both
goods and services. The other option explored was whether the Central TAX would
be on goods and services but state TAX would be only on goods since state to collect
TAX in services is difficult to determine.

This option also recommended one single return with both CTAX and STAX details
and PAN based registration. The authors have also discussed the constitutional
amendments required if TAX is ever to be introduced since without the amendment
taxing both goods and services using one tax is not possible. The paper also highlights
the issues in the credit mechanism in the CTAX/STAX model since it is difficult to
practically implement in terms of determination of place where service is taxable. The
other challenges to introduction of TAX in India highlighted are the availability of
strong IT network, infrastructure and programmes, agreement on other provisions like
basic threshold, exemption to goods/services, rates to be applied, etc.

Saravanan Venkadasalam, (2014) has analysed the post effect of the goods and
service tax (TAX) on the national growth on ASEAN States using Least Squares
Dummy Variable Model (LSDVM) in his research paper. He stated that seven of the
ten ASEAN nations are already implementing the TAX. He also suggested that the
household final consumption expenditure and general government consumption
expenditure are positively significantly related to the gross domestic product as
required and support the economic theories. But the effect of the post TAX differs in
countries.

Shaik, (215) studied the concept and impact of TAX on Indian economy. The study
also focused on some aspects of TAX models. This study also covered the advantages
and working of TAX. The study concluded that TAX in Indian framework will lead to
commercial benefits which were untouched by VAT system and would essentially
leads to economic development.

38
The commonly accepted advantage of the economic approach is that it “serves several
vital functions in risk policies:

1. It provides techniques and instruments to measure and compare utility losses or

gains from different decision options, thus enabling decision makers to make more
informed choices (not necessarily better choices).

2. It enhances technical risk analysis by providing a broader definition of

undesirable events, which include non-physical aspects of risk.

3. Under the assumption that market prices (or shadow prices) represent social
utilities, it provides techniques to measure distinctly different types of benefits and
risks with the same unit.

4. It includes a model for rational decision making, provided that the decision
makers can reach agreement about the utilities associated with each option.” (Renn
1992, 63f.)

There are a range of problems which both give rise to constant critique and drive
new efforts in economic research. The economic approach is based on the core
concept of the rational actor and his/her subjective utility function. Thus, rational
behaviour in economics means that individuals maximize some subjective (expected)
utility under the constraints they face.

Some basic assumptions of the theory of subjective (expected) utility are that
choices are made: - among a given, fixed set of alternatives;- with (subjectively)
estimated probability distributions of outcomes for each alternative; - in such a way as
to maximize the expected value of a given utility function.

Dr. Radhika Das did the first systematic study on taxation in her book, “Finances of
The Indian Union 1947”, published in 1966, by Central Book Depot, Allahabad. In
this book she has discussed only on taxation. (Direct, indirect and expenditure trends
also) Dr. Radhika Das covers each and every point about the taxation. This book was
an outcome from her Ph.D thesis, which was submitted to University of Allahabad in
January 1962. In this book she deals with the theory of taxation, tax co-ordination, tax
policy, central direct and indirect taxes, state taxes, taxation and economic
development, limit of taxation, burden of taxation and socialist pattern of society.

After Dr. Radhika Das, V.V, Borkar wrote a book on “Income Tax Reform in India”
in 1971. In his book he has discussed the concept of taxable income in first topic.
V.V. Borkar also analysis the two concept of deduction one is depreciation deduction
and second is business deduction. “The Theory And Working of Union Finance in
India” was written by R.N. Bhargava in 1977 and published by Chaitanya publication
house, Allahabad. In this book he has discussed the overall public finances in India
but he has specially stressed on taxation, debt, expenditure and financial adjustment.

As regards taxation he has explained about taxation theories, direct and indirect taxes
and even studied basic tax structure in the 1960’s also. This book gives the brief
history of all taxes as well as taxation in India and abroad. “Tax Policy” edited by
Malcolms Adiseshiah was published in 1987 by Lancer International, New Delhi.
Actually, this book on tax policy comprises the opinions of authorities on the subject.

39
They comment on the discussion paper issued by the Ministry of Finance on the
simplification and rationalization of direct taxes.

In this discussion Malcolms Adiseshiah, Amaresh Bagchi, B.J. Chacko, R.N.

Lakhotia, V, Gauri Shankar, K. Shrivasan and E.S. Venkatraniah have given their
contribution. Shree kantradhya’s, a book on “Structure of Reform of Taxation In
India”, is published in 2000 by Deep and Deep publications, New Delhi This is the
one of the systematic book on tax as well as tax reform in India This book tells us the
each and every information of taxes. It reviews the history of various taxes sand its
reforms, which have taken place step by step. It has also discussed direct taxes as well
as indirect taxes. This book of Shree kantradhya also gives the review of New
Economic Policy.

In a recent book titled, “Tax Policy Handbook” (1995) the author Parthssarathi Shome
has made a comprehensive review of all the terms used in tax theory. This is followed
by and in-depth analysis ofthe various components of the tax structure in general and
with special reference to India. The book covers theories, various concept oftaxation,
tax reform and IMF policy advice as well as tax structure of various countries the
following major aspects regarding taxation.

“Fiscal Deficit And Inflation In India”, is the book written by Dr. Ashutosh Raravikar,
published in 2003 by Macmillan Indian Ltd., New Delhi. This book is based on his
Ph.D. thesis. In this book he gives the total information of fiscal deficit of the central
government. Dr. Raravikar explains the various concepts of deficit in simple worlds.
He wrote a broad explanation on why deficit is rising? What is the way to control it?
Suggestions given are important and relevant.

“The Macroeconomic Adjustment Programme” this article is written by Mihir

Rakshit and published in Economical and Political Weekly, on 24 August 1991. The
Government has chalked out a programme for macroeconomic adjustment over the
short term and the medium run in order to resolve the fiscal crisis and tackle the
problems of inflation and the balance of payment. The long run objective of the new
policies was to promote efficiency and enterprise through delicensing of industries,
liberalization of the financial market, decontrol of foreign trade and free entry of
foreign capital. Mihir Rakshit has focused on the macroeconomic adjustment policies
embodied in the union budget and has also considered the medium run macro
implications of the exim policy, delicensing of industries and financial liberalisation.

Fiscal deficit was the major problem in 1991 this was discussed by Shri.R.J.Mody in
the article “Fiscal Deficit And Stabilisation Policy. ” which was published in
Economical and Political Weekly, 15 Feb 1992. In this article author comments that
the international experience examined here shows that it the budget deficit, which is
relevant for price stability. And for monitoring the financial liabilities of the central
government in reduction to its repaying capacity, what is relevant is the net fiscal
deficit. In the article "Fiscal Correction For Economic Growth" (Published in
Economical and Political Weekly, 10 June 2000.) the author Rakesh Mohan states that
rapid economic growth is the only solution to the problem of poverty and such growth
is not possible without significant fiscal correction.

40
The key objective official reform has to be a reduction in public debt service
payments. This article analyses data on state and central government revenues and
expenditure to suggest ways to climb out of the debt trap. Pavan K. Aggrawal in the
article ‘'Income-inequality and Elasticity of Personal Income Tax" published in
Economical Political Weekly, July 20, 1991. Develops the technique for establishing
the effect of a change in inequality in the distribution of income tax. It is found that
for a given tax schedule and increased inequality increases yield of personal income
tax in India. He is of the opinion that Government policies directed to reduce
inequality in the distribution of income reduced the yield of personal income tax and
this is a factor, which should be taken into account while forecasting tax revenue.
Amaresh Bagchi in his article “Strengthening direct Taxes” published in Economical
Political Weekly February 18 to 25, 1995.

Review the trend in revenue from direct taxes both personal and corporate though the
ratio of direct tax revenue to GDP is raising in India yet as compared to other
developing countries this ratio is still small. The tax reforms committee to increased
yield of income tax as follows the policy of tax base expansion, reduction in rates and
efficient tax administration the author however feels that the government measures to
implement the recommendation are inadequate and more major are needed. Has tax
rate reduction led to more tax revenue mobilization is examined by Pinaki
Chakraborty in the article “Tax Reduction And Their Revenue Implication - How
valid is laffer curve? ” in the article, it published in Economical Political Weekly,
April 26, 1997. Though author examined the actual experience in India for the period
1990-91 to 1996-97. The author concludes that as compare to indirect taxes direct
taxes are more beyond than indirect taxes. However due to time lag involved the
laffer curve phenomenon is found to be applicable for some taxes for some time only
and that with tax rate reduction tax revenue will increase is two optimistic in case of
India.

R. J. Chelliah examines tax proposals presented in the budget for 2002-03 in his
article “Tax policy as revealed in the budget for 2002 to 2003” Economical Political
Weekly, March 16 2002. The author opinion that the tax proposals presented in the
budget for 2002-2003 indicate that the 9 government is trying to combine the
principle oftax theory through reforms. However there are several add hoc changes
including increases in number of concession which has destabilization effect.

Economic research showed that these assumptions are convincing in some situations;
however, they may not correspond empirically with many situations of economic
choice. The limits of the ‘normativeeconomic model’ lead to an extensive range of
research activities: - Strategies which try to preserve the normative concept of decision
making develop more complex statistical models and focus on the outcomes and
not on the processes of decision-making. As far as estimated outcomes correspond to
the observable outcomes the models are accepted as sufficient. (However, this
approach contains the problem that for specific measures accurate knowledge about
the processes is also necessary in order to achieve policy objectives. Otherwise
pseudo-correlations and the appearance of side effects are insufficiently controlled.)

Other strategies seek to modify the core-concept by developing concepts of

decision-making that take into account limitations encountered in the real world. In

41
this context research referring to “bounded rationality” (e.g. Simon 1987) examines
empirical observable modes of decision-making. Such approaches are widespread in
behavioural economics pursuing for the natural logic or observable ways of how people
think and decide (e.g. Weber/Baron/Loomes 2000).

Some researchers want to restrict the economic approach to specific areas where it
seems useful to speak about rational decision-making and where it is accepted that
there are other logics of decision-making which couldn’t meaningfully described in
the realm of utility-maximization (e.g. Jaeger et al. 2001, Renn et al.

2000).

Optimal taxation theory involves designing and undertaking a tax that lowers distortion
and inefficiency in the market equilibrium under certain economic conditions. The
fundamental theory of optimal taxation comprises choosing the tax that will maximise
welfare function of the society considering a given set of constraints. In addition, if the
first best outcome is not feasible and you have to seek for the second best then the
design and implementation of the optimal tax requires knowing how to increase the
number of outcome from a heterogeneous population using socially optimal way
(Mankiw, Weinzierl, & Yagan, 2009.

Related and relevant available literature at home and abroad was reviewed to find out
the research gap, formulating research questions, and to limit the scope of the
research. The outcome of the review of literature is summarized below. Tax planning
means to create situations and investment portfolios, which are tax efficient. It is
about taking maximum advantage of exemptions, deductions, rebates, and reliefs
allowed for under the act to reduce the tax liability to its minimum (Mathew, 2016).
Tax planning involves efficient use of various provisions and loopholes of tax laws to
reduce the rate of tax and tax burden of an assessee (Pallavi & Anuradha, 2017).

Tax planning is an assortment of financial activities in such a way that could

maximize tax benefit by making the use of all beneficial provisions in the tax laws; it
entitles an assessee to avail certain exemptions, deductions, rebates and reliefs to
minimize her/his tax liability (Mansuri & Dalvadi, 2012). Tax planning can be
defined as an arrangement of one’s financial and business affairs by taking lawful
benefit of all deductions, exemptions, allowances, and rebates to reduce the tax
liability to its minimum (Saravanan & Lakshmi, 2017). Based on the tax benefit
received by the assessee, tax planning can be divided into two types: short range tax
planning and long-range tax planning. The act of longrange tax planning is more
beneficial for assessee as well as for the government (Pallavi & Anuradha, 2017).

law (Shil et al. 2016). Tax evasion is unlawful, tax avoidance is not an offense, but tax
planning is ethical and lawful. Tax planning is vital for every assessee to reduce their
tax liability and compliance with the income tax rules (Dey & Varma, 2016). Tax
planning is not for a few, but all honest and prudent assessees. A wrong choice may
lead to an agonizing burden while a right step in the right direction through proper tax
planning may lead to tax savings (Metha cited in Vasanthi, 2015). All transactions in
respects of tax planning must be by the true spirit of statute and should be correct in
form and substance (Savita & Gautam, 2013). Tax planning doesn’t mean not paying
taxes, it just means being smart about where to place money to get maximum
investment allowance (Mansuri & Dalvadi, 2012). Tax planning does not mean

42
skipping the payment of income tax; it is just an efficient allocation of earned income
in different tax savings investment instruments to attain maximum benefits by an
assessee (Kalgutkar, 2018). Tax planning is a process of evaluating the financial
profile of individuals and businesses to reduce the tax amount on business income or
personal earnings (Mgammal & Ismail, 2015).

In India, households are the largest contributors to the national pool of savings. Their
share in net domestic savings in India remains around 70 percent on an average
(Rajeswari, 2014). The highest number of respondents invested in the life insurance
policy (41 percent) and the second most preferred tax savings investment is in public
provident fund (21 percent) (Jose & Joseph, 2016). In another study on India shows
that 88.3 percent of the respondent assessees have invested in the life insurance policy
(Arara & Gupta, 2017). Individuals in higher age group, state, and central government
employees, and more skilled employees are very cheerful with their tax planning
schemes.

The level of satisfaction also does not vary among the educational level (Vasanthi,
2014). The most used tax saving device in India is the life insurance policy followed
by the provident fund (Savita & Gautam, 2013). Thus it is evident from the review of
available literature that many research works have been done on individual tax
planning in India. There is some literature on corporate tax evasion and avoidance in
Bangladesh. But there is hardly any literature on individual tax planning in
Bangladesh context. Here is a research gap, and that’s why the present study is an
attempt to fill in this gap.

Actual Investment and Donation Table-1 demonstrates that the individual tax
planning practices in investment items were higher than donation/ philanthropic items
in the promulgated areas. Most of the assessees under the study contributed to
benevolent fund (60.31 percent), provident fund for government employees (53.61
percent), group insurance scheme (45.36 percent), and recognized provident fund
(39.18 percent). It should be mentioned here that all of the above mentioned four
items were under mandatory investment for individuals employed in government
organizations and some private organizations. So, the credit for investment in the
above mentioned areas should not go to individual assessees.

There were several voluntary investment schemes available to individual assesses,

and that should be the focal point of tax planning practices. From this viewpoint,
highest investment was made by individual assessees in deposit pension scheme
(40.72 percent) followed by life insurance premium (36.60 percent), and investment
in saving certificate (31.44 percent) in that order. In India, life insurance was the first
tax saving instrument, and the provident fund was the second most adopted tax saving
instrument (Savita & Gautam, 2013).

A few individual assessees invested in a superannuation fund (13.40 percent), in

stock, shares, etc. (13.40 percent), in the desktop computer (20.10 percent), in laptop
computer (19.59 percent), and in Government Treasury Bond (0.52 percent). It is also
evident from table-1 that the actual scenario of donation by individual assessees was
very insignificant in Bangladesh. Highest by individual assessees was in Zakat Fund
(5.67 percent) followed by jointly in prime minister’s relief fund (3.09 percent) and
welfare institutions for disabled people (3.09 percent). No donation was made to Aga
Khan Development Network, ICDDRB, CRP Savar, and Asiatic Society of

43
Bangladesh. Only 0.52 percent individual assessees invested in a charitable hospital
approved by National Board of Revenue (NBR), Muktijuddho Jadughor, Ahsania
Mission Cancer Hospital, National level institutions set up for the commemoration of
the liberation war, Science and Technology Fund under the Ministry of Science and
Technology, etc.

Amaresh Bagchi in his article “Strengthening direct Taxes” published in Economical

Political Weekly February 18 to 25, 1995. Review the trend in revenue from direct
taxes both personal and corporate though the ratio of direct tax revenue to GDP is
raising in India yet as compared to other developing countries this ratio is still small.
The tax reforms committee to increased yield of income tax as follows the policy of
tax base expansion, reduction in rates and efficient tax administration the author
however feels that the government measures to implement the recommendation are
inadequate and more major are needed.

Has tax rate reduction led to more tax revenue mobilization is examined by Pinaki
Chakraborty in the article “Tax Reduction And Their Revenue Implication - How
valid is laffer curve? ” in the article, it published in Economical Political Weekly,
April 26, 1997. Though author examined the actual experience in India for the period
1990-91 to 1996-97. The author concludes that as compare to indirect taxes direct
taxes are more beyond than indirect taxes.

However due to time lag involved the laffer curve phenomenon is found to be
applicable for some taxes for some time only and that with tax rate reduction tax
revenue will increase is two optimistic in case of India. R. J. Chelliah examines tax
proposals presented in the budget for 2002-03 in his article “Tax policy as revealed in
the budget for 2002 to 2003” Economical Political Weekly, March 16 2002. The
author opinion that the tax proposals presented in the budget for 2002-2003 indicate
that the 9 government is trying to combine the principle of tax theory through
reforms. However there are several add hoc changes including increases in number of
concession which has destabilization effect.

Dahl & Mitra (1991) described three applications of tax policy models developed by
the World Bank during the course of its economic study in Bangladesh, China and
India. The Bangladesh model narrates upon shifting of tax burdens in influencing the
relative attractions of different options for raising revenue. The China model depicts
broad uniformity of tax rates for a large number of sectors with a dual price system.
The Indian model focussed more upon liberalisation policy for tax reform. It is also
reviewed about the cost of constructing tax policy models. Sury (1993) made an
historical analysis of the various aspects of income tax in India. The author rivets on
tax rate structure, exemptions, concessions and evasion. The author brought in,
changes the Income Tax Act 1886, Income Tax Act 1918, Income Tax Act 1922,
Income Tax Act 1939, and Income Tax Act 1961. The specifically analysed the post
globalisation effects on tax reform. Gupta, Lahiri and Mookharjee (1995) made an
empirical analysis on income tax compliance in India from 1965-55 to 1992-93.

They found that low tax rates, plethora of exemptions significantly affect the
revenue collection. The loop holes of tax structure contributed a lot for slow and low
tax compliance. They have also identified the negative effect of declining assessment

44
intensity. They have quoted that best practice of enforcement, assessment and tax
structure policy could have yielded at most a 90 percent revenue increase leading
India’s income tax performance below the average of countries with similar GDP per
capita. This study has been carried out by taking regression equation on compliance
and income tax revenue with variables like income base, inflation rate, vector of tax
structure, vector of enforcement variable and vector of dummy variable for other
policy measures. It is concluded that contrary to the upward trend in real income tax
revenue during the study period, tax compliance appears to be declined appreciably.
In addition empirical results shows that increased average tax rates and
exemption limit appear to have reduced compliance and revenues of the country.

Pillarisetti (1995) made a comparative study between India and Latin American
countries. The author annotates that prevalence of extreme high rate of tax over
several years resulted in institutionalised corruption and tax evasion in India in
1980s and 1990s. The author also added Indian direct tax reform failed to neutralise
non compliance and tax evasion. India’s approximately 50% legal reportable income
is untaxed. This theoretical paper also glossed up the sectoral equity issues. India’s
highly progressive tax structure can extract tax revenue from organised sector
leaving informal sector which becomes more vulnerable widespread tax evasion. This
creates inequality in tax system across the organised and informal sector. It is pointed
out that a fundamental issue in a tax system is “ability to pay.” The author
surprised the non inclusion of this economic well being issue of tax payer in direct tax
reform measure.

Sarkar (1997) dealt with corporate income and incidence of corporate taxation. The
paper critiqued the responsiveness of corporate tax to corporate income in India
with a view to assess the justification of the imposition of minimum alternative
tax.

The committee was formulated by the Finance Ministry under the chairmanship of
Vijay L. Kelkar. Out of the report Reforms of Tax Administration in direct taxes
refers to deficiencies and scope of improvement in Administration. The report states
that in practice, tax policy and tax administration mutually affected each other which
is the reason of loss of significant portion of potential tax revenue, in India. In
developing country, like India it is said that tax administration is tax policy. This
would imply that, however fine the design of the tax structure might be in a
representative developing country, it is the interpretation and implementation of the
law that counts. These elements reflect the need for adequate capacity of theta
administration in place to implement the law.

At the same time, experience reveals that a particular tax administration mechanism
could alter the original intention of tax policy and structure. In the long run, it has to
be ensured that tax administration instruments facilitate, rather than ignore or hinder,
the implementation of tax policy goals. The tax administration, as it can’t play the role
of policeman to all taxpayer, its action must provide sufficient deterrence so as to
induce voluntary compliance. The fundamental role of tax administration is order of
priority i) To render quality taxpayer services to encourage voluntary compliance of
tax laws; and ii) To detect and penalise non-compliance. The functions of the tax
administration comprises of various activities. (i)Taxpayer’s education and services
(ii) Collection of information (iii) Dissemination of information (iv) Storage and

45
retrieval of information (v) Verification(appraisal/assessment of information) (vi)
Collection of taxes (vii) Taxpayer’s grievances redressal system and (viii)
Accountability

(i) Taxpayer’s education and services

- Traditionally, the role of the tax administration has been to enforce the tax laws and
provide at least minimal taxpayer service. When the taxpayer base was expanded, it
became necessary for the tax administration also to facilitate compliance through the
provision of quality taxpayer service. Generally tax evaders in most countries,
particularly developing countries, can be classified into two categories. The first
category relates to those who fail to comply because of information asymmetry (lack
of information) and the tax administration’s failure to provide this information. The
second category relates to those who refuse to comply because of deficiencies in the
taxpayer’s Information system and supporting institutional setup.

Therefore, the latter, in effect, is also because of information asymmetry efficient for
the tax administration to provide quality taxpayer service and reduce the size of the
first category. Taxpayer service typically refers to the provision of information and
material by the tax administration to the general mass of taxpayers so as to facilitate
compliance with the tax law. Provision of quality taxpayer service is an integral part
of the enforcement strategy of any tax administration Taxpayer service typically
refers to the provision of information and material by the tax administration to the
general mass of taxpayers soaps to facilitate compliance with the tax law. A cross-
country survey of taxpayer service indicates that the relatively more successful tax
administrations provide relatively high levels of taxpayer service. In this regards the
Task Force Committee has suggested following measures to expand the present scope
of the taxpayer service program;

(I) The income tax department must expand qualitatively and quantitatively,
the present scope of taxpayer service.
(II) The expenditure on taxpayer’s service must be increased from the present
level of about one percent of the total expenditure on tax administration to
at least five percent. In this regard, an important start should be made by
the establishment of taxpayer’s clinic in different parts of the country to
enable taxpayers to walk in for assistance. The Task Force feels that better
treatment of existing taxpayers has an important role in encouraging those
outside the tax net to become taxpaying citizens.
(III) The department should provide easy access to taxpayers through Internet
and e-mail and extend facilities such as tele-filing and tele refunds. It
should design special programs for retired people, low income taxpayers
and other such groups with special needs who cannot afford expensive
services of tax consultants.

Collection of information-The establishment of an effective taxpayer information

system is crucially dependent upon a unique identification numbering system such
that the information relating to various indicators of wealth, expenditure and financial
transactions can be collected and collated. The committee recommends that: The PAN
should be extended to cover all citizens and therefore serve as a Citizen Identification

46
Number. This will obviate the need for the Home and Labour Ministries to issue new
numbers. Given the manifold increase in the coverage of PAN, the responsibility for
issuing should be transferred to an independent agency outside the income tax
department. However, the income tax department should have online access to the
database for tax enforcement like any other agency. The requirement of quoting PAN
may be expanded to cover most financial transactions.

For the administrative purpose the information for taxpayer for identification can be
grouped broadly in three heads: Taxpayer’s Declaration (Under the system of self-
assessment, the taxpayer forms the basic source of information), Information Returns
(This is a more widely used device to collect information. Information returns are
declarations filed with a tax administration by persons required to report details of
their financial dealings with other taxpayers.) and Field Survey (In addition to
information from taxpayer’s return and other information returns, a large volume of
information also gets collected during assessment, searches and seizures and survey
operations)In view of the extant method of collection of information and constraints
in digitizing the volume of information received by the tax administration, the
Taskforce recommended that : Income Tax Act should be amended to provide for
submission of annual information return. by third parties in respect of various
transactions as may be prescribed. For this purpose, a proper format of the return also
needs to be prescribed. Consequently, the flow of information will be continuous and
the discretionary power with the CIB to collect information will be eliminated.

(ii)Such annual return of information (including returns relating to tax deducted at

source) should be mandatorily required to be submitted on electronic format.
(iii)Many of the Departments involved in transactions specified in Rule 114B do not
have any mechanism for obtaining the PAN of the concerned person. It is, therefore,
necessary that the pro forma used by them for their departmental purposes, e.g., the
application form for transfer of motor license, should have the necessary column
requiring the applicant to disclose his Permanent Account Number (PAN). (iv) The
Department should set up a structure for Electronic Data Interchange (EDI) with some
of the major departments and organisations involved in the transactions.

Brief Summary of some Empirical Studies

One of the most influential papers on the topic of estimating PAYE Gap was
conducted by Pessaries and Weber in which they estimated the size of Britain’s black
economy (defined narrowly as unreported taxable income) by using income and
expenditure data drawn from the 1982 Family Expenditure Survey. Pessaries and
Weber compared the relationship between food expenditure and income in two groups
of workers, self-employed and employees in employment, assuming that employees
reported their incomes correctly. For a given level of reported income, the self-
employed had higher food expenditure than employees. Pessaries and Weber
concluded Page | 17 that the self-employed actual income is 1.55 times reported
income, and that this part of the unobserved economy was about 5.5 % of GDP in the
United Kingdom in 1982 (Pessaries and Weber, 1989).

The Income tax assessment system in India comprises of Intimation of tax/refund on

returned income (Section 143(1)(a)); limited scrutiny. (Section 143) introduced by the
Finance Act, 2002 with effect from 1st June, 2002 to disallow inadmissible loss,
exemption, deduction, allowance, or relief claimed in the turn; and full scrutiny.

47
(Section 143) As there is Hugh backlog in processing in house return, itis
recommended outsourcing the data entry work and the time limit for processing the
data work. The scrutiny should be selected on scientific basis through help of risk
analysis by computer and it to be done in detailed with full investigation. Radical
improvement in tax administration calls for a transformation of organization and
methods.

Modern information technology greatly facilitates such transformation. The

availability, cost, and accessibility of modern computers make them ideal for the
large-scale information processing and coordination problems facing tax
administrations. To speed up the process of modernization, the Task Force therefore
recommends the following:(a) The Government should establish a national Tax
Information Network (TIN) on a build, operate and transfer basis. (b) TIN will
receive, on behalf of the tax administration, all TDS returns and other information
returns for digitization. The TIN will therefore serve as a gateway to the National
Computer Centre of the Income Tax Department. It will help overcome the paucity of
technical manpower and inadequate technical infrastructure.

Accountability The ability of the tax administration to perform its role effectively
and efficiently is in turn determined by its ability to coordinate and adapt over time
the organizational structure and its resources. Traditionally the tax administration has
been placed within the Ministry of Finance CBDT, which is responsible for
administering the direct tax laws, should be given the requisite autonomy so that it is
made more accountable. It is suggested that the control of the Central Government
over the tax administration be exercised through memorandum of Understanding
(Moue) between the Central Board of Direct Taxes and the Central Government.
Moue should specify financial commitments, provide for full financial autonomy and
control over deployment of human resources, should have exclusive power for
designing the enforcement strategy. The ultimate accountability of the tax
administration is to the citizens. With a view to enhancing accountability of (and
transparency in) tax administration, it is important that the CBDT publishes an annual
report of its own, along the lines of the UPSC / CVC, that is tabled in Parliament and
put on its web site.

The annual report must separately provide for performance achievements of each
Chief Commissioner / Commissioner. In addition, the quarterly progress of
achievement must be displayed on the web site, so that taxpayers have an opportunity
to respond. While defining a stricter accountability structure, however, care must be
taken to eschew an excessive and regimented accountability system which over-
burdens AOs with onerous and fragmented oversight that ultimately only serves to
reduce its overall effectiveness. Human Resource Management-The absence of
control over human resources has further undermined accountability. Therefore, we
recommend that the Central Government should delegate to CBDT full authority and
responsibility regarding staff of the income tax department and its secretariat. The
CBDT should, however, exercise such delegated powers in a transparent manner
within the framework of rules and guidelines framed for this purpose.

Such rules and guidelines should be framed with the approval of the government
Infrastructure. The Task Force was aghast at the physical environment prevailing in
most tax offices. We were also told by professionals that office space, work
conditions and basic conveniences for staff, as well as storage facilities for tax

48
records, are grossly inadequate. Facilities for taxpayers are even worse. The existing
office layout is inimical to modernization and induction of information technology.
To institute these changes, the Task Force recommended that (a) Based on the report
of the Task Force set up by the CBDT in pursuant to our recommendation in the
Consultation Paper; the CBDT should request Chief Commissioners to identify the
shortcomings in their offices by 1st April 2003 and send forward a proposal to CBDT.

By 1st August 2003 a model Commissioner including the offices at the range, circle
and ward levels should be established in each zone. (c) CBDT should seek the
requisite financial sanction to replicate the model offices by either upgrading existing
offices or, where necessary, by purchasing new premises, etc. The entire exercise
should be time bound so that by January 2005, modern offices are in place in all
Commission rates. This was suggested to bring simplicity in tax administration,
improvement in functioning, changes in exiting system to improve the performance of
the Tax Administration.

Refund-The failure of the tax administration to issue refunds continues to be a major

source of public grievance. This is partly due to its inability to promptly process there
turns, whose numbers have increased substantially in the last three years, and partly
due to the cumbersome process for issuing of refunds. The Committee recommends
that a) The existing cumbersome and manually-operated procedures for issue of
refunds must be replaced by a more efficient IT-based system. Under the new system
the department will prepare a separate file of all refunds daily which will be
downloaded by a payment intermediary, i.e., a designated bank. (b) The designated
bank will be authorized to issue computerized refunds as is the current practice for
issuing dividend and interest warrants by companies.(c) The designated bank will be
required to transmit the information relating to the issue of refunds to the TIN, which
will also allow a taxpayer to verify the status of his/her refund claim.

In a study by Martinez-Lopez in which he used the Spanish household surveys over

the period 2006-2009, and in which he replicated the approach by Pessaries and
Weber but extended its interpretation by including the concealment of income by
salary workers, it was found that the reported income by the self-employed has to be
increased by about 25 % to obtain the level of income which would equal the level of
underreporting by employees (Martinez-Lopez, 2012). In a study conducted by
ZIPAR titled Uncovering the Unknown: An Analysis of Tax Evasion in Zambia, it
was discovered that applying the tax thresholds to the income of both the self-
employed and the paid employees, they estimated the average tax liability for each
household. This amount was then multiplied by the average number of people with
taxable income in each of the two categories, annualized and compared to the reported
PAYE for 2010. The study revealed that the PAYE gap amounted to K5.2 billion,
which was 6.7 % of GDP and 40.3% of the total tax revenue.

The study showed that by just concentrating on the wage earners who were above the
tax threshold, the Zambia Revenue Authority would have collected an additional
K800 million from those classified as wage earners even before taxing the 10 % of the
self-employed. Notwithstanding the difficulty and administrative burden that would
result from collecting this money, as pointed out by Pahari and Kabaso (2012), the
study showed that about 10 % of the many people who were in self-employment were

49
above the tax threshold for paying PAYE tax in 2010 and would potentially contribute
as much taxes as those in wage employment. 2.2 Brief Summary of Selected
Countries Which Estimate Tax Gaps A number of countries undertake tax gap
estimates. Prominent examples of countries estimating various types of tax gaps
include France, Sweden, the United States of America (USA), and the United
Kingdom (UK). Several individual states of the USA also estimate tax gaps, such as
Minnesota, Idaho, New York and California. Other countries with lists of publicly
available tax gap estimates include New Zealand, the Philippines and Brazil. Sweden
has estimated tax gap on a broad range of taxes and social security levies including
VAT for the years 1997 and 2000. Sweden’s tax gap estimates are calculated to
provide guidance on the magnitude of the gap.

i. Reduction of large inequalities of income and tax.

ii. Widening the tax base.
iii. Tax incentives for production and investment.
iv. Financing the selected research institutions by the government.
v. The commission opined that a progressive system of public expenditure could
have positive impact on ability and willingness to pay taxes.
vi. The commission identified that the present tax system is highly progressive
only for the urban groups with expenditure levels over Rs 300 a month. Hence
same tax may be levied on higher rural income.
vii. vii. The commission also in favour of implementation of wealth tax later to
supplement
income tax.
viii. Introduction of wealth tax, capita gain tax, gift tax and personal expenditure
tax for widening the tax base and generating more resource.
ix. ii. Tax evasion was a measure problem for generation of revenue. Thus rigid
policy can curb the menace. Benami holdings should mandatory be disclosure
and blank transfer of both shares and bearer shares should be abolished.
x. iii. Moreover comprehensive reporting system on direct taxation in general
and on capital transactions in particular should be introduced as a measure to
control tax evasion.
xi. iv. In addition the committee also suggested a compulsory auditing of
accounts of incomes in excess of Rs.50, 000 and Rs.l, 00,000 in case of
business income and other personal income respectively.
xii. v. The maximum rate of income tax should not exceed 45% or 7 annas a rupee
in the place of present income tax and super tax for all levels of income above
the level of Rs 25000. The loss of revenue for such measure may be Rs18
crores but revenue can be generated by checking tax evasion which amounts
to several times of the loss amount.

3.1. Non-compliance

Considering the individual perception, Jackson and Milliron (1986) estimated 14

significant determinants of tax evasion. On the contrary, Riahi-Belkaoui (2004)
conducted a cross-country analysis regarding tax non-compliance without concerning
the individual level. Richardson (2006) combined the cross-country framework of
Riahi-Belkaoiu (2004) and the determinants postulated by Jackson and Milliron

50
(1986) of individual level to elaborate the tax evasion concept. However, the subject
matter of income tax non-compliance is vast, as IRS (Inland Revenue Services) of the
USA identified 64 factors related to non-compliance behaviour (Young, 1994). People
consider tax evasion as a lower level of crime compared to other criminal activities
(Burton, Karlinsky & Blanthorne, 2005), which complicate the scenario of income tax
non-compliance behaviour. Therefore, Kasipillai and Jabbar (2006) state that tax
compliance depends on social attitude and behavioural aspects of taxpayers;
sometimes complex combination of circumstances might work as catalyst as well.

Different researchers defined non-compliance in different ways, which resulted in

controversy among the definitions. McBarnet (2001) defined non-compliance as
failure to submit return, whether willingly or unwillingly. On the contrary, James and
Alley (2002) emphasised imposing constraint on the continuality and narrowness of
the definition. Instead of stating tax non-compliance as the failure of paying tax, they
stated as the failure of tax obligation where some behaviour violated law and other did
not. As tax morale varies according to culture, different countries have a different
level of tax compliance (Alm & Torgler, 2006). For example, tax compliance was
higher in Singapore, New Zealand, Australia and lower in Italy, Sweden, Turkey
(Riahi-Belkaoiu, 2004), while Malaysian taxpayers were moderately tax compliant
(Kasipillai & Jabbar, 2006).

3.2 EVSCALE

Researchers (i.e., Riahi-Belkaoui, 2004; Richardson, 2006) identified several aspects

of income tax non-compliance and measured non-compliance attitude in country basis
data with proxy variable that barely considered individual’s opinion (Khlif & Achek,
2015). Roberts (1994) constructed a measurement instrument, named after Noncomp,
to measure tax non-compliance and made an experimental analysis among students.
The reliability test showed high reliability of the instrument with 0.93 value of
Cronbach’s alpha. The measurement instrument consisted of 15 items with a seven-
point Likert scale starting from 1 (very non-compliance behaviour) to 7 (very
compliance behaviour). Later, Kasipillai and Jabbar (2006) used 13 items from
Noncomp and added two items in the context of Malaysia. They named the
measurement instrument after EVSCALE. Kasipillai and Jabbar (2006) used
EVSCALE to measure the individual non-compliance attitude in a micro direct
approach. Al-Mamun et al. (2014) measured the non-compliance behaviour in
Malaysia using this instrument as well. The instrument has been experimented in
developing Asian economy like Malaysia, however, not in the context of Bangladesh.

3.3 Income Level and Income Tax Non-compliance

Pissarides and Weber (1989) found that British people had actually 1.55 times higher
income than they reported. This deliberate under reporting of income creates
ambiguity to shape the income tax non-compliance behaviour. Evidence shows that
higher income people have a good record in the case of tax compliance comparing to
lower income people (Muibi & Sinbo, 2013). Kong and Wang (2014) experimented
that high- and low-class earners were more tax non-compliant compared to middle-
class earners. On the other hand, Witte and Woodbury (1985) found that middle

51
income earners were more compliant. Although the income level impacts non-
compliance behaviour of the people, the extent of influence is equivocal.

3.4 Age and Income Tax Non-compliance

Age significantly influences the non-compliance behaviour of the people. Clotfelter

(1983) investigated that younger taxpayers are more non-compliant than older
taxpayers. This result was stable in 33 different countries (McGee & Tayler, 2006)
and in Australia (Wenzel, 2004). Older people have more social attachments that
make them more compliant (Torgler, 2004). On the contrary, the finding of Wahlund
(1992) is equivocal as he found otherwise in Sweden. Palil (2010) opined that young
people had more ethical obligation compared to elders and thus they had more
compliance. However, Richardson (2006) found no significant relationship between
tax non-compliance and age. Due to different socio-economic and demographic
behaviour, the role of age differs in the case of constructing non-compliance.

3.5. Role of Tax Knowledge and Tax Morale on Income Tax Non-compliance

Empirical studies found that the more a person had tax knowledge, the more income
tax compliance the person possessed (Kirchler & Maciejovsky, 2001; Obid, 2004;
Roshidi, Mustafa & Asri, 2007). Study found that possessing different tax knowledge,
male made their own decision of attitude towards compliance while female
reconsidered other’s attitude towards compliance behaviour (Fallan, 1999). On the
contrary, tax knowledge has detrimental impact as vast knowledge of taxation
sometimes leads to very low tax compliance by finding loop holes for tax evasion
(Groenland & van Veldhoven, 1983). Tax morale not only indicates individual’s
behaviour, but also illustrates individual’s attitude (Torgler, 2003). Moral obligation
plays a significant role in terms of non-compliance behaviour (Bobek & Hatfield,
2003). Asian countries have goodwill about having a good tax morality (e.g., Japan,
China, India and Bangladesh).

3.6. Occupational Obligation and Income Tax Non-compliance

Occupational variety influences the non-compliance behaviour of the people

(Andreoni, Erard & Feinstein, 1998). In Albania and Netherlands, people consider the
probability of evasion while deciding on the source of income (Gërxhani & Schram,
2006). Usually, people engaged in agriculture with small trade volume, small business
and private enterprise have more opportunity to evade tax (Kong & Wang, 2014). In
the United Kingdom, self-employed people were more income tax non-compliant and
they understated their income complaining that they had to spend more on food.
However, we can reject this opinion as there was no evidence regarding higher
propensity to food consumption at that time in England (Pissarides & Weber, 1989).

3.7. Gap Study

52
Tax gap analysis provides tax administrations and their stakeholders with a measure of
the amount of tax revenues lost or foregone through both non-compliance and policy
decisions. While a modern tax system is predicated on voluntary compliance, there are
often few other tools available to a revenue administration to measure and monitor
taxpayer compliance holistically. Tax gaps estimated using the IMF’s RA-GAP
approach, provide a comprehensive analysis of overall revenue losses that can be used
as strategic context for decision making on resource allocation and individual
administrative or policy measures. They also contribute to transparency in public
administration as a strategic performance indicator for tax administration.

TCMP audits were used to measure the difference between reported taxes and taxes
owed for randomly selected taxpayer samples. This information was then extrapolated
to the entire population of taxpayers using the sample weights associated with each
stratum of the sample (Ricketts, 1992). Thus, measures of the India tax gap became
commonly reported. The IRS also made TCMP data available for research projects
which, in the opinion of the IRS, had the greatest potential contribution to the IRS and
the community. Several of these studies were then published in the U.S. economics
and tax literature; for a review, see Andreoni et al. (1998).

CHAPTER 4. DATA INTERPRETATION

1. AGE

AGE PERCENTAGE

15-18 20

18-25 80

25-30 0

30-50 0

53
 AGE

15-18 18-25 25-30 30-50

The total sample was categorized on the basis of age into four major segments .Out of
98 respondents,
43.9% were between 20 – 30 years age span , 16.3% were below 20 years, 27.6%
were between 30-40
years. And 12.2% were above 60 years.

The total sample was categorized on the basis of age into four major segments. Out of
100% respondents, 20% were between 15-18 years age span, 80% were 18-25 below 25
years, Age between 25-30 years old are 0%. And Age between 30-50 year old are 0%.

2. GENDER

GENDER PERCENTAGE

MALE 58.8

FEMALE 41.2

54
 GENDER

MALE FEMALE Prefer not to say

The total sample was categorized on the basis of Gender into Two major segments. Out
of 100% respondents, 58.8% were Male, 41.2% were Female rather than Prefer not say.

3. What is your company's primary sector ?

FINANCE 35.3%

MARKETING 23.5%

IT 5.9%

OTHERS 35.3%

55
 Sales

FINANCE MARKETING IT OTHERS

According the above Chart, 35.3% are Finance company's primary sector, 23.5% are
Marketing company's primary sector, 5.9% are IT sector and 35.3% are Others.

4. Are you aware of the income tax laws and regulations in your country ?

YES 88.2%

NO 11.8%

56
 Sales

YES NO

 According to the above data, it is clear that 82.2% are Yes fully aware of the
income tax laws and regulations in our country, 11.8% are not agreed of the
income tax laws and regulations in our country.

 As we can see that the large percentage of the income tax laws and
regulations in our country are aware.

 The remaining are not aware about income tax laws and regulations.

5. Have changes to the company income tax rate affected your salary ?

YES 64.7%

NO 35.3%

57
 Sales

YES NO

 According to the above data, it is clear that 64.7% are fully Yes income tax
rate affected your salary, 35.3% are not agreed of the income tax rate
affected your salary.

 As we can see that the large percentage of the income tax rate affected
your salary yes.

 The remaining are not agreed income tax rate affected your salary.

6. Whether your company has deducted any tax from your salary ?

YES 64.7%

NO 35.3%

58
 Sales

YES NO

 According to the above Pie Chart company has deducted any tax from your
salary.

 64.7% are fully Yes Income Tax Deducted from Our Salary

 35.3% are not agreed of the Income Tax Deducted from Our Salary.

7. Do you have any source of income besides your main job ?

YES 12.5%

NO 87.5%

59
 Sales

YES NO

 According to the above Pie Chart say that source of income besides your main
job.

 12.5% are fully Yes, 87.5% are not agreed source of income besides your main
job.

8. Have you ever faced any issues while filing your income tax reports ?

YES 12.5%

NO 87.5%

60
 Sales

YES NO

According to above Pie Chart are facing Issue while Filing Income Tax reports. 12.5%
are Yes facing Issue while Filing Income Tax reports, and 87.5% are No facing any
Issue while Filing Income Tax reports.

9. Have income tax deduction in your salary affected your expenditures ?

YES 68.8%

NO 31.3%

61
 Sales

YES NO

According to above Pie Chart say that income tax deduction in your salary affected
your expenditures. 68.8% are yes and 31.4% are no.

10. Have you ever availed any tax exemptions or benefits ?

YES 56.2%

NO 43.8%

62
 Sales

YES NO

According to above pie chart ever availed any tax exemptions or benefits, 56.2 % are
yes tax exemptions or benefits are get and 43.8% are Not get any tax exemptions or
benefits.

CHAPTER 5: CONCLUSION, SUGGESTIONS AND

RECOMMENDATION

5.1 CONCLUSION

 In conclusion, the impact of company income tax on a developing economy

is complex and depends on various factors such as tax rate, business
environment, and investment levels. A well-designed and effectively
implemented company income tax system can be a key driver of economic

63
 growth and development, but care must be taken to ensure that it does not
discourage foreign investment or place an undue burden on businesses.

 Corporate taxation, particularly is a drag on the economy. High-taxing

governments miss the point that wealth is generated within companies and
that this wealth is continuously redistributed as remuneration to
employees and to investors. However, companies need capital to generate
wealth, and this comes from investors. Corporate taxation penalises
investors and later penalises employees too as companies invest less or
leave the country.
 Companies are increasingly integrated into a global economy and are no
longer limited to their original domestic markets. In order to stay on course,
India and Bangladesh should at least harmonise its tax burden and
regulatory complexity to the same level as the rest of the world. This
implies a decline of more than 20% in overall corporate taxation.
 This would merely make as competitive as its better-performing neighbours
of similar size, such as Germany and the United Kingdom. If India and
Bangladesh were to aim at becoming more competitive, then an effort of
more than 20% would be necessary. This would not necessarily cause a
decline in government revenues. On the contrary, if corporate taxation is
drastically reduced, so are tax compliance costs, resulting in a broadening
of the tax base.

 Both changes in the level of revenues and changes in the structure of the tax
system can influence economic activity, but not all tax changes have
equivalent, or even positive, effects on long-term growth. The argument
that income tax cuts raise growth is repeated so often that it is sometimes
taken as gospel. However, theory, evidence, and simulation studies tell a
different and more complicated story. Tax cuts offer the potential to raise
economic growth by improving incentives to work, save, and invest. But
they also create income effects that reduce the need to engage in productive
economic activity, and they may subsidize old capital, which provides
windfall gains to asset holders that undermine incentives for new activity.
 In addition, tax cuts as a stand-alone policy (that is, not accompanied by
spending cuts) will typically raise the federal budget deficit. The increase in
the deficit will reduce national saving—and with it, the capital stock owned
by Americans and future national income—and raise interest rates, which
will negatively affect investment. The net effect of the tax cuts on growth is
thus theoretically uncertain and depends on both the structure of the tax cut
itself and the timing and structure of its financing.
 Several empirical studies have attempted to quantify the various effects
noted above in different ways and used different models, yet mostly come
to the same conclusion: Long- persisting tax cuts financed by higher deficits
are likely to reduce, not increase, national income in the long term. By
contrast, cuts in income tax rates that are financed by spending cuts can

64
 have positive impacts on growth, according to the simulation models. In
modern United States history, however, major tax cuts (in 1964, 1981, and
2001/2003) have been accompanied by increases in federal outlays rather
than cutbacks.
 The effects of income tax reform—revenue- and distributionally-neutral
base-broadening, rate-reducing changes—build off of the effects of tax cuts,
but are more complex. The effects of reductions in rates are the same as
above. Broadening the base in a revenue neutral manner will eliminate the
effect of rate cuts on budget deficits. It will also reduce the impact of the
rate cuts on effective marginal tax rates and thus reduce the impact on labor
supply, saving, investment, etc.
 However, broadening the base will have one other effect as well; by
reducing the extent to which the tax code subsidizes alternative sources and
uses of income, base broadening will reallocate resources toward their
highest value economic use and hence will raise the overall size of the
economy and result in a more efficient allocation of resources. These effects
can be big in theory and in simulations, especially for extreme policy
reforms such as eliminating all personal deductions and exemptions and
moving to a flat-rate tax. But there is little empirical analysis of broad-based
income tax reform in the United States, in part because there has only been
one major tax reform in the last fifty years.
 Still, there is a sound theoretical presumption—and substantial simulation
results— indicating that a base-broadening, rate-reducing tax reform can
improve long-term performance. The key, however, is not that it boosts
labor supply, saving or investment—since it raises the same amount of
revenue from the same people as before—but rather that it leads to be a
better allocation of resources across sectors of the economy by closing off
targeted subsidies.
 An admittedly less than fully scientific source of evidence is simply asking
economists what they think. In a survey of 134 public finance and labor
economists, the estimated median effect of the Tax Reform Act of 1986 on
the long term size of the economy was one percent (Fuchs et al. 1998). Note
that TRA 86 did not reduce public saving, so the growth effect was entirely
due to changes in marginal tax rates and the tax base. The median response
also suggested that the 1993 tax increases had no effect on economic
growth.
 Basic exemption limit for Individual and HUF should straight increase to
6.50 lac. No need of Rebate of 12500. So remove Rebate of 87A for Rs.
12500. Please Read 3rd Point for detailed suggestion for taxation of
Individuals/ HUF How to Create Hindu Undivided Family (HUF) MODES
OF CREATION OF HUF a Hindu Undivided Family can be created by
following ways Blending means transfer of one's individual property in the
common hotchpot and make it a part of the common property of the HUF.
There must be an intention to throw the separate property into the common
stock and it is necessary to waive all separate rights in respect of the
property, which must be clearly establish.

65
 Remove new regime of tax for Individual and HUF as it has not gained
popularity. Hardly few have adopted and chances are less for future for any
more Taxpayer would like to convert to new regime. Please Read 3rd Point
for detailed suggestion for taxation of Individuals/ HUF.
 The international tax system is a complex system of interlocking principles
deriving its sustenance from both domestic tax law and a patchwork of bilateral
DTAAs. The domestic-international hybrid of rules presents taxpayers with a
complex and occasionally impossible challenge of compliance but also provides
taxpayers with an opportunity to arrange their commercial affairs in such a way
that they can exploit the chinks in the complex armours of international tax rules.
Taxpayers, particularly multinational companies took advantage of the inherent
flexibility afforded by contractual relationships (sale, purchase, lease,
incorporation, restructuring) to minimise their taxes worldwide.
 Tax law might want to impose a certain taxable status over the commercial
activities of companies but the intricate tax planning developed through ingenious
contracting by taxpayers has outsmarted frequently the reach of tax legislation.
The history of international tax law has so far been a history of the trump of
contracts over status. In the international tax arena, the contract v status trope
extends to two peculiarities of the system: much tax planning by companies is
meant to deny states nexus over their activities, and allied nexus denial is the
equally important issue of the manipulation of prices for services and products
exchanged between constituent units of the same multinational group (transfer
pricing).
 The 1993 act raised tax rates on the highest income households, but also
reduced the deficit and thereby increased national saving. One strong
finding from all of the analysis is that not all tax changes will have the same
impact on growth. Reforms that improve incentives, reduce existing
subsidies, avoid windfall gains, and avoid deficit financing will have more
auspicious effects on the long-term size of the economy, but in some cases
may also create tradeoffs between equity and efficiency. These findings
illustrate both the potential benefits and the potential perils of income tax
reform on long-term economic growth.

5.2 SUGGESTIONS

 Having reviewed the major conclusions relating to the present study and after going
through the major recommendations of various Committees and Commissions
appointed by the Government of India for the express purpose of introducing certain
direct tax reforms, the following suggestions emerge out of the present study.

 Improving the fairness of direct-tax system needs to be paid priority attention; in

other words, instead of increasing tax-rates, it is advisable to identify new areas,
through which exercise, it is possible to distribute the burden of taxation on to some
more eligible people.

66
 The fiscal policy has necessarily to be aimed at creating a climate which would
allow an Sample use of direct taxes in the long run.The tax structure in India, in
general, is overly coitplicated and an average assessee cannot easily comprehend
the statutory provisions.

 This is a general opinion about the overall tax structure so far as the direct taxation
procedure in the country is concerned. This confusion is more profound as there are
a number of divisions and sub-divisions of the taxable entities and the tax-rates for
each of than are different.

 Moreover, the rate structure is not uniform; consequently, tax-rates are not
determined on scientific basis but are fixed arbitrarily.

 Comparatively higher tax rates prevalent in the country's tax system tend to
encourage tax evasion and discourage the spirit of mutual cooperation between the
taxpayers and the tax collectors.

 The reduction in tax-rates holds the potential of offering an alternative solution to

the problem of tax evasion.The Government had appointed Chelliah Cornuttee to
examine the structure of direct taxes and recommend suitable modifications for
making the tax system more broad-based, elastic and simplified. Raising the
exemption limit of income-tax and reducing the tax- rates on different income slabs
with maximum marginal rate of 40% above Rs.2.0 lakh;

 Withdrawal of exemption to various saving instruments like NSCs, equity-linked

saving plans, etc Introduction of presumptive tax scheme for small shop owners and
traders whose annual turnover falls between Rs.3.0-5.0 lakhs; Introduction of
'estimated income scheme' for the people engaged in brokerage business or working
as commission agents.

 Exemptions are rather important aspect of the direct-taxes, because these facilitate
balanced economic growth, promote export trade, advancement in science and
technology, accelerate the rate of saving, investments, production and capital
formation, promote education, sports, cultural and social amenities, etc.

 On the whole, the process of 'unconplieating' the country's direct tax structure 1ms
picked up particular momentum during last four fiscal years, on the lead taken by
Dr. Manmohan Singh, the Union Finance Minister. His Budget speeches reflect an
earnestness of purpose in this behalf.

 Still, much needs to be done to make the tax structure truly responsive to country's
fiscal needs. Broadening the tax base is just one of the measures. Other potential
areas are Simplified and taxpayer-friendly tax administration.

 Streamlining of tax-rates and tax-slabs for their easy comprehensibility to the

taxpayers; Simplifying 'exemptions and deductions' to an extent that lay tax- payers
can understand them easily;

67
 Formulation of a single Direct Tax Code bringing together all present (and also the
future) direct tax provisions. With the opening of the economy to global forces of
competition, it is imperative that the direct tax structure too needs to imparted
dynamism, so as to fulfil Government's development objectives and people's
welfare aspirations.

 Tax systems in Bangladesh sufer from weaknesses in both tax administration and
policy.The weaknesses in the tax system and tax administration have contributed to
the very low level of tax collection in Bangladesh, undermining the government’s
capacity to provide necessary public services.

 Modernization of VAT, income tax and customs administration would go a long

way in enhancing tax revenue in Bangladesh. Tax administration should be geared
toward providing taxpayers’ services.

 Modernization of tax administration will be the key to realize revenue potential in

Bangladesh. Outdated tax administration based on geographical basis (circles),
absence of coordination among the three main wings (VAT, Income tax, and
customs) of the National Board of Revenue (NBR), lack of computerization, and
reliance on physical control instead of accounts, are the major factors contributing
to the failures in tax administration.

 The New VAT Act must eliminate existing distortions like truncated base, tariff
values, account current and tariff values. Reforms on the direct tax systems should
aim at reduction of exemptions/deductions and tax holidays, taxation of capital
gains, and harmonization of corporate and individual income tax rates to improve
equity and efficiency of the direct tax system. Despite some improvements, the
current VAT Law has characteristics excise type and should be eliminated to have a
modern accounts-based VAT system. The direct tax system suffers from a narrow
tax base, horizontal and vertical inequity, and strong.

 The present format of ITR as well as the one proposed in the draft Common ITR,
requires the assessee to furnish Financial Statements in a format adapted to the
requirements of the department for variety of reasons including meaningful
analysis. On one hand the department is in the rush to design the form and make it
bulky and less user friendly, whereas on the other hand, the assessee face unwanted
litigation when their case is selected for scrutiny based on absurd information.

 Contribution of financial statement is noteworthy in the profiling of any entity and

its obvious importance need not be reiterated. All departments including but not
limited to GST, Income Tax, MCA, RERA etc require financial statements to be
furnished as a part of their annual filing or monitoring process. Even banks require
financial statements as a part of their due diligence process while granting or
renewing of credit facilities. All the above departments, agencies and private bodies
require financial statements in different formats. At times, many queries of
mismatch are raised when details of such financial statements are regrouped and
reclassified as per the requirement of different departments. It may be noted that.

68
5.3 RECOMMENDATIONS

 The findings of this study have important policy implication for economic growth
in Company. The study has revealed presence of long run relationship between
income taxes, excise duty, customs duty and VAT on Company’s economic
growth as measured by GDP.

 Based on the study findings, the government of Company, when considering

change of a tax, The government should expand the tax bracket of Income Tax in
order collect more revenue for funding its expenditure instead of borrowing.

 This is because Income Tax positively impacts economic growth. Minimal

borrowing encourages economic growth because huge debts can signal the
possibility of a fiscal crisis and future economic policy reversals hence
discouraging foreign direct investment inflows.

 A combination of both fiscal and monetary policies aimed at raising the aggregate.
demand such as narrowing of tax base or increasing government expenditure
should be pursued. For example a narrow tax base for corporate Income Tax
attracts both foreign and local investment which leads to creation of employment.
This leads to increased Personal Income taxation because more people would be
employed.

 This will lead to higher absorption of readily available skilled and semi-skilled
labour, besides creating a platform for quality labour fermentation via adequate
and quality education, and relevant training In addition, 47 the government should
enter into trade agreements which favour free trade as opposed to protectionism.

 With less controls put in place the degree of openness of the economy to
international trade will increase hence more foreign capital inflows. This will
attract more corporate taxation that contributes to economic growth as corporate
Income Tax positively impact economic growth.

 Additionally, indirect taxes such as VAT and excise duty should be streamlined to
make them progress such that they are applied discriminatively in that goods and
services used by affluent segments of the population attract relatively higher taxes.

 Also international trade as represented by net exports has a positive correlation

with economic growth. To improve cross-border trade, prohibitive restrictions
such as high tariffs and general control over mobility of resources would have to
be removed. In view of this, the Government must fully and actively participate in
the regional economic blocks such as COMESA and EAC.

69
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74
 ANNEXURE

Analysis and Evaluation of the Impact of Company Income Tax Revenue

on the Developing Economies- A Comparative Analysis of Bangladesh,
India.

Google Form Link: https://forms.gle/3sWMGsMd2MvB5M138

Questionnaire

 AGE
a. 15-18
b. 18-25
c. 25-30
d. 30-50

75
 GENDER

a. Male
b. Female

 What is your company's primary sector?

a. FINANCE
b. MARKETING
c. IT
d. OTHERS

 Are you aware of the income tax laws and regulations in your country?
a. YES
b. NO

 Have changes to the company income tax rate affected your salary?
a. YES
b. NO

 Whether your company has deducted any tax from your salary?

a. YES
b. NO

 Do you have any source of income besides your main job?

a. YES
b. NO

 Have you ever faced any issues while filing your income tax reports?
a. YES
b. NO
 Have income tax deduction in your salary affected your expenditures?
a. YES
b. NO

 Have you ever availed any tax exemptions or benefits?

a. YES
b. NO

76