Public Finance and Taxation.docx - PUBLIC FINANCE AND...

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Unformatted text preview: PUBLIC FINANCE AND TAXATION PART I CPA Section 2 CCP Section 2 CIFA Section 2 CS Section 2 STUDY TEXT CONTENT 1. Introductions to public financial management Legal Framework PUBLIC FINANCE AND TAXATION 2. - General overview of public financial management as envisaged by the constitution - Overview of the public financial management Act - Financial regulations - Treasury circulars; meaning and application - Process of developing county government finance bills The operations of the national and county governments on management and control of public finance Establishment of National County Treasury - Responsibility of National and County Treasuries with respect to public funds Establishment, purpose and composition of intergovernmental budget and economic council 3. 4. Bca - The process of sharing revenue - The role of the Commission on Revenue on Allocation (COR) - The role of the council of governors in county financial management Establishment of public funds in the public sector - Provision of establishing public funds - Rationale of creation of public funds - The consolidated fund - The establishment and administration of contingency funds The establishment and administration of equalization funds Supply chain management in public entities - Definition and terminologies - General overview of Public Procurement and Disposal (PPD) Act - Procurement guidelines as envisaged by PPD Act Committees responsible for procurement - Procurement process by National, County and other Public entities - Tendering process and selection of suppliers in public sector - Concept of E-procurement Page 2 PUBLIC FINANCE AND TAXATION 5. Oversight function in public finance management - The role of National Assembly - The role of senate - The role of county assembly - The role of auditor general - The role of Internal Audit - Role of controller of budget in relation to disbursement of public funds as envisaged by the constitution and PFM Act, 2012 6. - Introduction to taxation History and purposes of taxation Principles of an optimal tax system Single versus multiple tax systems Classification of taxes and tax rates Impact incidence and tax shifting, Lax shifting theories Taxable capacity Budgetary and fiscal policy tools.: General definition of budgets terms ,Budget surplus and deficits Role of budget officers in budget preparation and execution Responsibilities of the national and county treasury in relation to budget preparation Budget process for both national, county and Public entities Revenue Authority — History, structure and mandate - Taxation of income of persons Taxable and non taxable persons Sources of taxable incomes Employment income; - 7. • • • • • • Bca Taxable and non taxable benefits Allowable and non allowable deductions Tax credits (Withholding tax, personal and insurance relief etc) Pension Income Business income: Sole proprietorship Partnerships (excluding conversions) incorporated entities (excluding specialised institutions) Turnover tax Page 3 PUBLIC FINANCE AND TAXATION - Income from use of property- rent and royalties Farming income Investment income Capital gains tax - Capital deductions Rationale for capital deductions Investment deductions: ordinary manufacturers Industrial building deductions Wear and tear allowances Farm works deductions Mining allowance Shipping investment deduction Other deductions - Administration of income tax Overview of the income tax act Identification of new tax payers Assessments and returns Operations of PAYE systems: Preparation of PAYE returns, categories of employees Notices, objections, appeals and relief of mistake A Appellant bodies Collection, recovery and refund of taxes Offences, fines, penalties and interest Application of ICT in taxation: iTaxi Simba system 8. 9. 10. Bca Administration of value added tax Introduction and development of VAT Registration and deregistration of businesses for VAT Taxable and non taxable supplies Privileged persons and institutions VAT rates VAT records Value for VAT, tax point Accounting for VAT VAT returns Remission, rebate and refund of VAT Rights and obligations of VAT registered person Offences fines, penalties and interest Enforcement Page 4 PUBLIC FINANCE AND TAXATION 11. Objection and appeals: Requirements and procedure Challenges in administration of VAT Customs taxes and excise taxes - Customs procedure - import and export duties - Prohibitions and restriction measures - Transit goods and bond securities - Excisable goods and services - Purposes of customs and excise duties - Goods subject to customs control - Import declaration form, pre-shipment inspection, clean report of findings - Other revenue sources 6.12 Emerging issues and trends TOPIC PAGE Topic 1: Introductions to public financial management Legal Framework……………….………............6 Topic 2: The operations of the national and county governments on management and control of public finance……………………………………………………………………………….…………37 Topic 3: Establishment of public funds in the public sector……………………….…………….….…..64 Topic 4: Supply chain management in public entities……………………...…………………….……...74 Topic 5: Oversight function in public finance management………………………...………….……….94 Topic 6: Bca Page 5 PUBLIC FINANCE AND TAXATION Introduction to taxation……………………………………………………………………….104 Topic 7: Taxation of income of persons……………………………………………………………….138 Topic 8: Capital deductions………………………………………………………………….…..…….217 Topic 9: Administration of income tax………………………………………………………..……….261 Topic 10: Administration of value added tax …………………………………………………………...278 Topic 11: Customs taxes and excise taxes………………………………………………….……………303 Revised on: November 2016 TOPIC 1 INTRODUCTIONS TO PUBLIC FINANCIAL MANAGEMENT LEGAL FRAMEWORK INTRODUCTION TO PUBLIC FINANCE Meaning of Public Finance Public finance is related to the financing of the state activities and a narrow definition of the public finance would try to say that public finance is a subject which discusses the financial operation of the fiscal or of the public treasury. Bca Page 6 PUBLIC FINANCE AND TAXATION Nature of Public Finance Public finance has been held as a science which deals with the income and expenditure of the government’s finance. It has been held as a study of principles underlying the spending and raising of funds by the public authorities. The various theories which form the basis of the collection; maintenance and expenditure of the public income constitute the subject and matter of finance. Scope of Public Finance The scope of public finance is not just to study the composition of public revenue and public expenditure. It covers a full discussion of the influence of government fiscal operations on the level of overall activity, employment, prices and growth process of the economic system as a whole. According to Musgrave, the scope of public finance embraces the following three functions of the government’s budgetary policy confined to the fiscal department the: • allocation branch, • distribution branch, and stabilization branch. These refer to three objectives of budget policy, i.e., the use of fiscal instruments to secure: • • Adjustments in the allocation of resources Adjustments in the distribution of income and wealth, and Economic stabilization. Public finance is composed of the following constituents public: • • • • Expenditure Revenue Debt ( Financial ) administration Private finance is the study of the income, debt and expenditure of the individual or a private company or business venture or an association. It includes the study of their own view regarding earning expenditure and borrowing. Similarities and Differences between Public Finance and Private Finance Despite the differences in scope and nature of the public finance and private finance, following are similarities. Bca Page 7 PUBLIC FINANCE AND TAXATION Similarities I. Based on Similar Theories The basis of public as well as private finance is the same. Both seek the help of various principles of economics in determining various interrelated problems. For example, a person wants to secure maximum utility on count of minimum expenditure and government too wants to secure public utility by spending the least possible amount of public money. II. Both Face the Problem of Scarcity Limitation of the resources is the problem before private as well as public finance. Individuals’ resources are limited up to this earnings; past savings and ancestral property similar governments’ resources also depend on taxable capacity of the individuals earnings of the various corporations etc. None of the two is capable of extending its expenditure beyond a certain limit; hence non can afford to go to the infinity in the use of finance. III. Both Require Efficient Administration Private as well as public finance require efficient administration to look after the various acts of extravagance. In the event of the failure of an efficient administration both might be compelled to face ‘dire-consequence’ in their financial field, individual never wants any kind of wastage or misuse of his income, so the government if it is alive to the sense of duty. IV. Both Borrow and Must Repay To run the administration of finance sometimes money in hand fails to fulfill the requirements especially in the times of emergency, governments borrow money from individuals and also borrow from different sources like relatives, banks, at the same it is obligatory for both the public finance as well as the private finance to repay the debt. The point here is that none can live without repaying the amount. V. Both are Based on Rationality of Thought When an individual spends some money he makes it certain in his mind that money is spent in the best way. He applies his rational faculties. In the same way any irrational step taken by the government may bring wastage and misuse of finance. This irrationality lead them to damages while rationality to prosperity and achievement of goals. Differences between Public Finance and Private Finance i. Individual determines his expenditure on the basis of his income but government determines its income on the basis of its expenditure. As far as an individual is concerned he determines his expenditure on the basis of the income, in the sense that he cannot think of spending more than his income. He distributes the amount of income to be spent on Bca Page 8 PUBLIC FINANCE AND TAXATION various subjects with income at his finger tips. The position is quite contrary in the case of government. The government first decides the amount of expenditures to be done during a period of time, and then frames scheme to secure money to meet the expenditure. Government has the power to increase its income be internal borrowings but this is not possible for an individual. ii. Government’s source of income is more flexible in comparison to private source. Government has legal power to extend the sources of its income according to the needs of the time. Government has the control over the whole national property but individual has to rely upon his own individual standing. Moreover, government can take the help of the foreignment and this is not possible for a person to secure such supports. The last resort available to the government is the printing of new currency notes to increase its income. But an individual will be definitely but behind the bars for such an office. iii. It is easy for an individual to base his expenditure on the law of equal marginal utility, but far difficult for governments. Individual is free to measure his expenditure in the sense of utility and spends his money on the certain weighted subjects. These subjects may not be of social need or may not add anything to social advantage. Such expenditures are very prominent in the democratic countries for example building of hospitals, roads, parks. iv. Private finance is narrow and short lived in comparison to public finance. Private finance faces suspension with the end of the individual’s life or with the closure of the particular business enterprise. But governments are more tenable. It is well said in this context is that ‘king may come and king may go but government is eternal.’ Governments keep on moving form generation to generation interlinking past from present with an eye on future. v. Public finance is subject to public censor but not the private finance. A complete secrecy may be maintained by an individual regarding his income and savings. But the government records are furnished to let the people see through the desirability of the expenditure. Public is entitled to know, criticize and the press is free to comment on the public finance outlays, its drawbacks and failures. vi. There are pre-determined policies behind public expenditure but not so in the case of private expenditure. Public expenditure is done to achieve the goals which are predetermined in their nature. vii. There is difference in the budgeting process of the public finance and the private finance. The budget of the government is subject to the approval of the parliament of the concerned country. It is now a well established principal no taxation without representation and no tax shall be without the due/process of law. Unless the demand gets approval of the parliament of the executive cannot spend even a single penny. But individual is his own master and he need not ask for parliamentary approval for spending his bricks. viii. Governments’ accounts are audited by constitutional authorities but private finance has its own arrangement. An individual can audit his accounts without performing formalities about it. But there is procedural necessity in the case of public finance. The budget is to be prepared in the prescribed manner and to be presented according to the settled norms. ix. A Bca Page 9 PUBLIC FINANCE AND TAXATION private individual can face the crises of being bankrupt but no government can be bankrupt. An individual may ‘run-riot’ his money and thus may become an insolvent, but the question of the government being bankrupt is impracticable. It is funny to talk of the bankruptcy of the government; since all the currencies are printed and circulated by it. Functions of Modern Government We should know the role of the government to enable us to appreciate the importance of government sector. Government of a modern state generally undertakes the following functions: 1. Security - Both external and internal involving outlay for military, police and other protective services. 2. Justice or settlement of disputes 3. The regulation and control of economy – including the services such as coinage, a. weights and measures, the business practices , operation of public sector b. undertakings 4. Of social and cultural welfare through education, social relief, social insurance, health and other activities. 5. Conservation of natural resources. 6. Promotion of the unity of the state by control of transportation and communication. 7. Administration and financial system, government revenue expenditure and fiscal control. 8. Education and employment. 9. Housing. 10. Public health. 11. Upliftment of weaver sections of the society. 12. Restore social justice in the society. Functions of modern governments are broadening due to socio-political reasons. Therefore, to discharge these increasing functions, the government has to increase its expenditure. To meet out the enormous amount of expenditure it has to mobilize funds with the help of public finance policy. Hence public finance has developed into an important branch of economics. Bca Page 10 PUBLIC FINANCE AND TAXATION Scope of Public Finance Public finance deals with the income and expenditure pattern of the Government. Hence the substances concerned with these activities become its subject matter. The subject matter of the public finance is classified under five broad categories of which the first two are discussed. They are, 1. 2. 3. 4. 5. Public Revenue Public Expenditure Public Debt Financial Administration Economic Stabilization Public Revenue Under this category, the sources of the public revenue, principles of taxation, effects of taxes on the economy, methods of raising revenue and the like are dealt with. Public revenue is the means for public expenditure. Various sources of public revenue are: A. Tax Revenue, and B. Non-tax Revenue A. Tax Revenue Taxes are compulsory payments to government without expectation of direct return or benefit to tax payers. It imposes a personal obligation on the taxpayer. Taxes received from the taxpayers, may not be incurred for their benefit alone. Tax revenue is one of the most important sources of revenue. Taxation is the powerful instrument in the hands of the government for transferring purchasing power from individuals to government. The objectives of taxation are to reduce inequalities of income and wealth; to provide incentives for capital formation in the private sector, and to restrain consumption so as to keep in check domestic inflationary pressures. From the above discussion we can conclude that the elements of taxation are as follows: a. b. c. d. e. f. Bca it is a compulsory contribution government only imposes taxes in payment of tax an element of sacrifice is involved taxation is aimed at welfare of the community the benefit may not be proportional to tax paid tax is a legal collection. Page 11 PUBLIC FINANCE AND TAXATION The various types of taxes can be listed under three heads. First type can be titled taxes on income and expenditure which include income tax, corporate tax etc. The second is taxes on property and capital transactions and includes estate duty, tax on wealth, gift tax etc. The third head, called taxes on commodities and services, covers excise duties, customs duties, sales tax, service tax etc. These three types can be reclassified into direct and indirect taxes. The first two types belong to the category of direct taxes and the third type comes under indirect taxes. B. Non-tax Revenue This includes the revenue from government or public undertakings, revenue from social services like education and hospitals, and revenue from loans or debt service. To sum up, non-tax revenue consists of: i) interest receipts ii) dividends and profits iii) Fiscal services and others. Public Expenditure Recently, there has been both quantitative and qualitative change in government’s expenditure. This category deals with the principles of public expenditure and its effect on the economy etc. Government of a country has to use its expenditure and revenue programs to produce desirable effects on national income, production, and employment. The role of public expenditure in the determination and distribution of national income was emphasized by Keynes. The term “Public Expenditure” is used to designate the expenditure of government-central, state and local bodies. It differs from private expenditure in that governments need not pay for themselves or yield a pecuniary profit. Public expenditure plays the dual role of administration and economic achievement of a nation. Wise spending is essential for stability of government and proper earnings are a prerequisite for wise spending. Hence planned expenditure and accurate foresight of earnings are the important aspects of sound government finance Public expenditure is done under two broad heads viz., developmental expenditure and nondevelopmental expenditure. The former includes social and community services, economic services, and grants in aid. The latter mainly consists of interest payments, administrative services, and defense expenses. Expenditure can also be classified into revenue and capital expenditure. Bca Page 12 PUBLIC FINANCE AND TAXATION A. Plan and Non-plan Expenditure Expenditure is classified under the following heads: I. Non-plan Expenditure Non-plan expenditure of central government is divided into revenue and capital expenditure. Under non-plan revenue expenditure we include interest payment, def...
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