Taxation In Developing Countries

Taxation is the only practical means of raising the revenue to finance the govt spending in developing countries. Setting up an efficient and fair tax system is however not simple particularly for developing countries that want to become integrated in the international economy.

The ideal tax system in developing countries should raise essential revenue without excessive govt borrowing and should do so without discouraging economic activities and without deviating too much from the tax system in other countries.

CHALLENGES FOR ESTABLISHING AN EFFICIENT TAX SYSTEM

Developing countries face many challenges when they attempt to establish efficient tax system.

1.       Firstly most workers in developing countries are typically employed in agriculture or in small informal enterprises. As they don’t get a fixed wage, income tax can’t be imposed.

2.       Secondly, due to the lack of well educated and trained staff, it is not easy to create an efficient tax administration in developing countries.

3.       Thirdly, because of the informal structure of economy it is difficult to generate reliable statistics as a result of which tax policies become less effective.

4.       Fourthly The existence of black money is much higher in these countries and many people attempt tax evasion.

5.     Lastly, A great portion of the population in developing countries is illiterate. They don’t understand the importance of tax system.