QUESTION
(a) Giving
appropriate examples, distinguish between forward and backward tax shifting.
(b) Briefly
explain five factors that determine tax shifting.
Outline the
main types of duties to be levied on goods according to the provisions
of the Customs and Excise
Act (Cap.472).
ANSWER
(a) Forward tax shifting – This refers to
shifting the tax burden to the consumer through increase in selling
prices. For instance when the government
increases the amount of tax levied on products such as beer or cigarettes
companies increase prices of these goods.
Backward
shifting – This occurs when a producer of a taxed commodity transfers the money
burden of tax to the supplier of factors of production, who in turn is paid a
lower price for the factors of production.
E.g. farmers are at times paid lower prices for their produce when a tax
is imposed on the processor of the produce.
(b) Factors
determining tax shifting:
(i) Elasticity of demand and supply – The
more the elasticity, the lower the incidence on the sales. The higher the incidence on supply.
(ii) Nature of markets
In an
oligopolistic market (i.e sellers and many buyers) tax shifting to buyers is
high since few sellers can team up to determine the market price.
In a situation
where there are many buyers and sellers, a large portion of tax will be borne
by sellers.
For
a monopolistic market, the entire tax burden falls on the shoulders of the
buyer.
(iii) Government policy on pricing
In the case of
government price control, the supplier cannot increase prices hence cannot
shift tax burden to buyers and vice versa.
(iv) Geographical location
If taxes are
imposed on certain regions, it is hard to shift them to consumers because
consumers wil move to regions with low taxes.
(v) Nature of tax (direct or indirect tax)
Direct tax e.g
PAYE cannot be shifted whatsoever while indirect taxes can be shiften through
increase in prices.
vi) Rate of tax
If too high,
shifting can occur backwards or forwards, if too low, it may be absorbed by the
manufacturer.
(vii) Time available for adjustment
The person who
can adjust faster (buyer or seller) will be able to shift tax e.g if the buyer
cash shift to substitute goods, the seller will bear the tax burden.
(viii) The tax point
(c) Duties
according to Cap. 472
-
Import duties on
goods imported at rates specified in first schedule
-
Suspended duties on
imported goods at specific rates given in second schedule
-
Export duties on
goods exported at rates given in fourth schedule
-
Excise duty on goods
produced at rates specified in the fourth schedule
-
Dumping duty; duty
charged in addition to any other duty charged under Cap 472.
