CHAPTER 3 Flashcards
Ethics-meaning and application
Ethics means characters and customs. Aristotle was the first one to study ethics. He believed that ethical behavior is knowledge that actions are done for betterment of common good. To determine what is ethically good for the Individual and society,
Aristotle said it is necessary to possess 3 virtues of practical wisdom:
- temperance,
- courage, and
- Justice
LEGISLATIVE OFFICE?
Legislative office is a public trust, and every effort for personal gain through official conduct is a violation of that trust
The constitution requires the legislature:
to make a code of ethics prohibiting conflicts between the public duty and private interests of members
the legislature. to enact a code of ethics for all officials and employees of the state and its political subdivisions.
Original and Main Canons of Taxation discussed by Adam Smith in famous books “The Wealth of Nations”
Canons of taxation
Canons of taxation are the basic principles to run a good tax system. Adam Smith was the first economist to develop a list of canons of taxation. Later on, some new canons were added. These canons help tax legislators in constituting a good tax system. The canons of taxation are discussed below:
- Canon of Equity
This principal says that a person who earns more should pay more to the Government as compared to a person who earns less. As a result the person earning high income should pay tax at higher rate as compared to a person who is earning less income. It is one of the fundamental concepts to bring social equality and equal distribution of wealth in a country.
2 Canon of Certainty
The tax that a person is going to pay should be certain. Everything should be made clear and simple for the
taxpayer. It ensures that the taxpayer should have full knowledge about amount of tax payment, mode of
payment and the due-date. If this canon does not exist, it leads to tax evasion.
Another aspect of certainty is that the Government is also certain regarding the amount it will collect from tax.
- Canon of Convenience
The procedure for tax payment should be easy, convenient and taxpayer-friendly. The time and manner of payment must be convenient for the tax payer so that he is able to pay his taxes in due time. If the time and manner of the payment is not convenient, then it may lead to tax evasion and corruption
- Canon of Economy
The canon of economy states that the cost of collecting taxes should be as minimum as possible. The cost of tax collection should be lower than amount of tax received by Government. The purpose of collecting taxes is to generate revenue for the Government. If the canon of economy isn’t applied, the collected amount will not be sufficient for Government.
Additional Canons of Taxation
Functions of the government increased significantly since Adam Smith’s time. Accordingly, modern economists gave following additional canons of taxation.
- Canon of Productivity
It says that there should be fewer taxes with large revenues, rather than more taxes with lesser amounts of revenue. It is better to impose only those taxes that are able to produce larger returns. More taxes tend to create
panic and confusion among the taxpayers.
- Canon of Elasticity
Taxes imposed should be elastic i.e, they can be increased or decreased, according to the demands of the Government. If the tax is elastic in nature, Government can easily increase its revenue by increasing the rate of tax. An example of such tax can be the income tax, which is considered very much ideal in accordance with the canon of elasticity.
Canon of Flexibility
Flexibility is different from elasticity. A flexible tax quickly adjusts to the new conditions. If the tax system is not flexible, new areas will remain un-taxed.
Canon of Simplicity
The system of taxation should be simple. The entire process should be non-technical and straightforward. If it is difficult and complicated to understand, then it will lead to corruption.
Canon of Diversity
It says the the Government should collect tax from different sources rather than relying on a single source. If Government it relies on a single tax source it can be harmful for the economy. Therefore Government introduces both direct and indirect taxes.
MORALITY BEHIND TAXCOMPLINCE
There are three approaches to ethics for tax compliance which are as under:
1.Utilitarianism
tells us to aim for greatest happiness across the population.’happiness is the satisfaction of our desires.
2.Deontology bases ethics on the idea of duty.
3.virtue ethics
focus on the virtues we should have. A broad conception must be used here. Virtue is not only honesty but using one’s talents and leading a fulfilled life is also a virtue
Ethics for tax payers regarding taxation compliance
For taxpayers following APPROACHES
1.utilitarian approach, the important economic goal is to ensure that goods and services are available to everyone for decent life.
Utilitarian compliance level will be better
because there is great need of resources for general public and country.
2.Deontologist approach lay down absolute duties.
There is a duty of individuals to pay for social RESOURCES provided by Government.
The one who uses a public hospital or a public road, should pay for it So this approach says that it is obligation of taxpayer to pay tax for use of public facilities.
3.Virtue ethics says one should use one’s talents to the full. Financial incentives encourage people to use their talents but very high tax rates reduce those incentives.
Another virtue is charity either in form of cash or time. The more take-home cash people have, the more charities they can afford; and also find time to perform charity work.
A third virtue is independence. It is good to live on own money. Lower tax rate make independence easy.
Morality for citizens to pay taxes is justified so that:
State is able to provide proper infrastructure,
State is able to provide level playing field to all.
Tax avoidance
Tax avoidance
In recent years, tax avoidance is considerable public concern. It is compliance with the law, though aggressive or abusive avoidance,
as **opposed to simple tax planning **which seek to comply with the letter of the law.
1) Tax avoidance is the **legal use **of the tax law **to one’s own advantage, **to reduce the amount of tax payable. For example, it is upto tax payer that whether the business is started as patnership or company. In case of **partnership tax rates is lower than **that of company. Another EXAMPLE is starting business in a tax free zone.
.TAX EVASION
Tax evasion occurs when someone acts against the law
Tax evasion is an** illegal practice where individuals, AOPs and companies** unlawfully avoids payment of tax. In tax evasion **taxpayer intentionally conceals the true state of affairs to tax authorities. **It is punishable under the law.
For example, concealment of income, misclassifying income Under another head, claiming excess deductions, and claiming wrong tax credits.
TAX AVIODANCE PERCEPTION OF THREE APPROACHES POINT OF VIEW?
A utilitarian, concerned with aggregate welfare, might be willing for tax avoidance. If tax is avoided, wealth is kept in the private sector (means it will not go to Government). The utilitarian says that charging tax will put more burden on middle class who cannot afford hiring tax lawyers. The dissatisfaction of middle class will be more as compared to the satisfaction achieved by rich class.
A virtue ethicist would dislike tax avoidance. It is not ethical to exploit rules knowing that onexploiting it for oneself.
A deontologist will not favor tax avoidance, but might or condemn it either Deontologists can easily argue for a duty to obey the law.
Powers of tax administrators - Introduction
The tax administration is not responsible for tax policy and tax legislation but deals with current tax system. Federal
Board is the main administrative authority under the law to monitor various types of taxes.
During administration, FBR itself or through its staff exercises the following powers:
1.Power to collect revenue
2.Power to change the method of accounting
. 3.Power to make assessment of tax and
4.Power to attach bank accounts
5.Power to seize property
The authorities can misuse the above mentioned powers which can result in following against taxpayer:
1.Loss of property and income
2.Imprisonment
**So above powers if wrongly used can result in loss of fundamental human rights. So there is need for ethics so that tax authorities can use the powers fairly and with transparency and morality.
**
Pillars of tax administration
tax admit of taxpayer and keep check on the misuse of powers by tax authorities, following are the pillars
administration:
Fairness
Tax authorities should try to be fair, neutral and impartial while administering the law. There should be discrimination on the basis of race, sect etc.
**Transparency
**
All Proceedings must be transparent and must be seen as transparent.
Accountability
There must be a strong system of accountability for wrong doers which should stop corruption, nepotism and maladministration.
Equity
Similarly situated taxpayers should be taxed in same way by tax authorities. Due care should be exercised to ensure that salaried class is not taxed more than business class. Administrators should not achieve their objectives in an
irrational way.
Under 4 pillars, following are the ethical issues which are faced by tax administrating authorities:
- Corruption
- Confidentiality/Secrecy
- Conflict of interest
- Inconsistency in application of law
- Lack of autonomy
- Political influence
- Acceptance of gifts
- Discretion
To avoid pitfalls of abusive use of discretion, 7 principles for structuring discretion are as follows.
To avoid pitfalls of abusive use of discretion, 7 principles for structuring discretion are as follows.
- Open plans
- Open policy statements
- Open rules
- Open findings
- Open reasons
- Open precedents
- Fair informal procedure
esponsibilities of tax implementing authorities
Tax Administrators shall:
**1. Try to be impartial, fair, neutral and consistent in administration of law ignoring the race or economic circumstances.
**
2. Provide efficient and quality service to all stakeholders in an effort to exceed their expectation
- Follow the law completely and no exemptions or credit should be provided to the person who is not eligible for IT.
- Take all measures to collect tax on timely basis in the interest of the Government and at lowest cost
. 5. Make the payment of refunds on timely basis.
- Show the honesty and integrity to gain confidence of the government and taxpayers;
- Avoid participation in political activity.
- Educate taxpayers about their rights and obligations so that tax payers voluntarily comply with the requirements of law.
- Keep the confidentiality of the information provided by the taxpayer with highest level of security.
- Refrain from receiving gifts from actions and non-actions.
ETHICS FOR TAX PRACTITIONERS
Following are the** 5 fundamental** principles of ethics for tax practitioners:
**1. Integrity
**
The tax practitioner should be straightforward and honest in all professional and business relations. He must act honestly and with integrity. All tax laws should be followed properly. He should not misuse the money given by his client for payment of tax.
- Objectivity
Practitioner should not allow bias, conflicts of interest or undue influence of others to override their professional or business judgments.
- Confidentiality
The tax practitioner should keep all information confidential acquired in professional and business relationships. The information received from client should not be disclosed to anyone unless it is required by law. Further the information obtained from client should also not be used for personal benefit or for benefit of a third party.
**4. Professional Competence and due care
**
Tax practitioner has a duty to maintain professional knowledge and skill at such level that client receives a competent service. The practitioner should have complete knowledge and skill of the service provided by him. All tax laws should be applied properly in accordance with the circumstances. Staff members must also be well trained.
**5. Professional Behavior
**
The practitioner should follow the laws and regulations and should avoid actions which discredits the profession. He should follow the code of ethics developed for tax practitioner. He should behave with courtesy with people.
