TAXATION IN DEVELOPING COUNTRIES

Taxation in Developing Countries



Taxation in Developing Countries

Introduction

Developing countries in this modern era are facing numerous challenges as to establishing an effective tax system. The main aim of this research paper is to highlight the need for an effective tax system in developing countries. For the purpose of better understanding I have chosen the tax system of Maldives. Maldives being a developing country is highly indebted to the International Monetary Fund (IMF) and the World Bank. About 40% of its public finance is through the income earned from the Fishing and Tourism industry. Currently the tax system in Maldives is simple and easy to administer. The only tax levied in Maldives which is the most significant to the economy is the bed tax imposed in the tourism sector. Under the Maldives Tourism Act (Law No. 2/99), a sum of US$8/- or its equivalent in any currency accepted by the Maldives Monetary Authority shall be collected as tax payable to the Government of Maldives from each tourist per day of stay at a tourist resort, tourist hotel, tourist guesthouse or tourist vessel.

Discussion

One of the characteristics to be considered by developing countries is that by means of an effective tax system it helps to reduce the inequality gap between the rich and the poor. Although this is the case, in developing countries since most of the workers are engaged in agriculture or similar small industries and no fixed income is promised for them, to calculate a base for in come tax is difficult. Consequently, the use of income taxes and consumer taxes is minimal is these economies as a means to raise revenue for the government (Tanzi and Zee, 2001).

Secondly, by way of taxation the inefficiencies of the market system in economic resource allocation will overcome. By imposing higher taxes and subsequently the government providing the pubic goods and services, the market will be working efficiently and the private producers will refrain from over charging for the public goods they produce (James and Nobes, 1996/1997).

Implementing a tax system as means of raising revenue for public finance in developing countries is a vital consideration to be taken by those countries specially countries like Maldives where the sources of financing the government are limited. Specially by way of imposing income taxes which have been an intimidating challenge faced by them due its complexity and lack of sufficient resources. Therefore, taxation should be the main source of public finance in developing countries because it helps to redistribute the income which will reduce the poverty rate and also it helps to overcome the inefficiencies of the market system in allocation of economic resources.

Taxation Helps To Redistribute Income

In developing countries, the economy of such countries depends mostly on small diversified businesses. The incomes earned by those working in these industries are distributed in an uneven manner where there is a huge gap between the rich and the poor. To reduce this gap and to help minimize the income inequality gap, ...