Taxation Principles and Practice PDF

Running head: TAXATION PRINCIPLES AND PRACTICE
Taxation Principles and Practice
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TAXATION PRINCIPLES AND PRACTICE
Table of Contents
Introduction..................................................................................................................................2
Factors to consider in implementing a tax reform.......................................................................2
Differences in Direct and Indirect Taxes.....................................................................................3
Tax Avoidance Measures.............................................................................................................5
Conclusion...................................................................................................................................8
References....................................................................................................................................9

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TAXATION PRINCIPLES AND PRACTICE
Introduction
The meaning of a tax in financial terms is that of a financial charge or other forms of levy
imposed upon a taxpayer by the governing authority of a country. A tax reform can be defined as
the measure taken by a government to improve the efficiency of the existing system of tax
administration. The purpose of implementing a tax reform is to maximise the social and
economic benefits that can be achieved from the system of taxation. As taxation is an important
aspect in the role of state building by the states, there is an increasing importance being given to
the tax reforms. Taxes constitute of both direct taxes like personal income tax and corporate
income tax and indirect taxes like GST and VAT. A direct tax is one which is directly imposed
upon a person or an entity by the government on the income earned by them from various
sources. An indirect tax is a rather distinct form of tax which is imposed on a transaction
conducted between two individuals by the government. According to Adam Smith, the burden of
the indirect tax usually tends to fall on the final consumer purchasing the goods or using the
services. A tax avoidance practice is one in which an individual uses the tax regime prevalent in
a country to one’s own benefit to reduce the amount of tax which is required to be paid by them.
It is usually done through some legal means.
Factors to consider in implementing a tax reform
The main purpose of implementing a tax reform is to improve the revenue generated from
tax collection and use the same for the benefit of the nation. However, in order to do so, there are
a wide variety of factors to be taken into consideration in order to so. The primary factor is the
balance between equity and efficiency considerations of the new system. One such example is
the removal or reduction of taxes of the lower wage group employees in an organisation. While
lowering the tax rates improves the participation of people in the work force, improving their

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TAXATION PRINCIPLES AND PRACTICE
wages over time may not be a priority (Kreiner, Leth-Petersen and Skov 2016). Hence, there
should be a balance between the amount of tax collected and the growth in the economy over a
period of time. This is because of the increase in the marginal rate of tax paid by them. The tax
administration of the country which itself may act as an obstacle to a tax reform implemented by
a country. Administrative changes to the tax system may act as an obstacle to the tax reforms if it
includes additional costs to be incurred as a part of implementing the reform. Some tax reforms
may bring in organisational changes within the administration like requiring more resources, tax
collection agents and digitalisation of tax filing systems. The costs of collecting these taxes
should not exceed the revenues collected from the taxes by the government. The tax avoidance
concerns are another aspect which need to be carefully considered at the time of implementing a
tax reform by a country. Tax revenues are an important factor which tend to act as an obstacle to
the pro-growth reforms which a country looks to implement at a point of time (Oecd-ilibrary.org.
2020). The usual problem with these types of reforms is their dependence on the behaviour of the
people impacted by the reform. If people consider the tax to be too strict, then they may resort to
measures like concealing their income. In case of MNCs, they may consider shifting their home
base to a different country than the one in which they are currently operating. Another important
factor to consider is the International rules and commitments of a country. The prevalent rules in
the International business environment may prevent a country from reducing its taxes below a
certain level in terms of rate. Hence, this can prevent a country from implementing ground
breaking tax reforms as a part of its tax regime.
Differences in Direct and Indirect Taxes
The major difference between the direct tax and indirect taxes lies in their basic nature
and the manner in which they are charged. A direct tax refers to one which is directly imposed