Taxation in Low Income Countries a Vital Issue

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Taxation in low income countries A vital issue Ashok Shumshere JBR 2009-11-02 1:01 PM

The topic of taxation has experienced a comprehensive change of structure since last many years. With the beginning of supply side taxation, role of taxation has become more significant. Taxation is not only an effective instrument for resource mobilization — a “boot strap operation for financing economic development-but also a ‘tool kit’ for revenue collection to sustain growth and maintain equity and stability in the economy. If blood circulation is essential to keep the human body alive so is taxation to keep the economy alive.

Developing countries suffer from dearth of revenue because of low taxable capacity as the majority of people live below the poverty line with hardly any capacity to pay taxes to the government. On top, legal base of taxation is condensed with unrestricted tax shelters and tax administration is short of modern mechanism to spot new tax payers and bring them into the orbit of tax- net. According to the theory of structural change of taxes during the developmental process, the contribution of direct taxes will grow with the rise in per capita income, in turn the contribution of indirect taxes will comparatively slow down. Direct taxes have tactical importance and its preference over indirect

taxes is claimed on the ground of neutrality, welfare and excess burden. With time, it has been established that direct taxation gives the best accountability degree which translates to good governance, whereas indirect taxation have less tangible effects.

International comparisons of contribution as a percentage of revenue to GDP in developed and developing countries are as follows: - Tax/GDP ratio of Sweden was found to be 49.7 percent in 2008, while it was 50.0 percent in Denmark, 46.8 percent in Belgium, 36.5 percent in New Zealand, 28.2…...

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