QUEENS’ COLLEGE DISTANCE EDUCATION DIVISION

TEL. 011-8-12-19-82

ASSIGNMENT
ON
Public Finance & Taxation

Date: - _____________

Total Weight: - 30 %

Name: - ____________________________ ID NO: - ______________

Department: -_______________ Study center: -_____________ Entry year: - ___________

Program: DEGREE
This is the only assignment of this course.

This assignment is to be completed and submitted to the office of your center. Do not
attempt the assignment until you are certain that you have understood the units it covers and
have revised your self-test exercises and learning activities, and other necessary references.

If you have any question about the units and activities, state the item/s clearly on a
separate sheet of paper and attach to your assignment paper.
1. Discuss briefly the canon of taxation which is stated by Adam smith.

Adam Smith’s canons of taxation: In his famous book ‘Wealth of Nation’, Adam
Smith presented 4 canons of taxation which are also commonly referred to as the
Main Canons of Taxation. They are as follows:

1) Canon of equality or equity: By equality is meant equality of sacrifice.

Accordingly, Canon of equality states t that the burden of taxation must be distributed
equally or equitably in relation to the ability of the tax payers. Hence, to ensure
canons of equality, taxes are to be imposed in accordance with the principle of ability
to pay.

2) Canon of Certainty: This canon argues that the tax which an individual has to pay
should be certain and not arbitrary with respects to the time of payment, the manner
of payment, the quantity to be paid (tax liability) etc. In other words, Canon of
Certainty states that there must be certain to the taxpayer as well as to the tax-levying
authority in respect to certainty of revenue the government intends to collect over the
given time period.

3) Canon of Economy: This canon implies that the cost of collecting a tax should be
as minimum as possible. Any tax that involves high administrative cost and unusual
delay in assessment and high collection of taxes should be avoided altogether.

4) Canon of Convenience: According to this canon, taxes should be levied and

collected in such a manner that it provides the greatest convenience not only to the
taxpayer but also to the government. For example, it is convenient to pay a tax when
it is deducted at source from the salaried classes at the time of paying

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2. What are the objective of taxation which. Please Discus briefly.

The objectives of taxation are:

1. To Raise public revenue

2. To Remove inequalities income and wealth

3. To Ensure economic stability

4. To Reduce regional imbalances

5. To Create employment opportunities

6. To Prevent harmful consumption

7. To Divert resources beneficially

8. To Encourage exports

9. To Enhance standard of Living

3. What is direct tax? List some of them.

Direct Taxes: are taxes the impact and incidence of which fall on the same person.
Direct taxes are taxes which cannot be shifted on to the others. E.g. Employment
income tax

Direct taxes include income taxes, property taxes, and taxes on assets.

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 Types of Direct Taxes
1. Income tax

It is based on one’s income. A certain percentage is taken from a worker’s salary,

depending on how much he or she earns. The good thing is that the government is
also keen on listing credits and deductions that help lower one’s tax liabilities.

2. Transfer taxes

The most common form of transfer taxes is the estate tax. Such a tax is levied on the
taxable portion of the property of a deceased individual, including trusts and financial
accounts. A gift tax is also another form wherein a certain amount is collected from
people who are transferring properties to another individual.

3. Entitlement tax

This type of direct tax is the reason why people enjoy social programs like Medicare,
Medicaid, and Social Security. The entitlement tax is collected through payroll
deductions and is collectively grouped as the Federal Insurance Contributions Act.

4. Property tax

Property tax is charged on properties such as land and buildings and is used for
maintaining public services such as the police and fire departments, schools and
libraries, as well as roads.

5. Capital gains tax

This tax is charged when an individual sells assets such as stocks, real estate, or a
business. The tax is computed by determining the difference between the acquisition
amount and the selling amount.

4. What is Direct tax? List some of them?

Indirect taxes are basically taxes that can be passed on to another entity or individual.
They are usually imposed on a manufacturer or supplier who then passes on the tax to
the consumer.

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 Types of Indirect Taxes

What many people are not aware of is that practically everyone pays taxes, especially
indirect taxes. This is because taxes are imposed on almost all the products that we
consume. Here are some of the types of indirect taxes.

1. Sales tax

Whenever people go to the malls or department stores to shop, they are already about
to pay indirect taxes. Goods such as household items, clothing, and other basic
commodities are subject to such types of taxes. Upon payment at the counter, the
final sale price is padded with a sales tax that the store collects and pays to the
government.

2. Excise tax

Excise tax is also very common. When a manufacturer buys the raw materials for the
company’s products, for example, tobacco for cigarette companies, they already need
to pay indirect taxes on the items. Through a part of the normal course of business,
the manufacturer can pass on the burden to the consumers by selling the cigarettes at
a higher price.

3. Customs tax

Ever wonder why imported products are expensive? It is because of customs tax.
When a container filled with bananas from another country enters the US, the
importer pays a tax (customs tax), which is then passed on to consumers.

4. Gas tax

Yes, buying gasoline for vehicles contains an indirect tax.

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5. The following transactions are given for the tax year Hamle 1 st, 1998 to Sene 30th, 1999 for
Amantha General Trading Pvt. Ltd. Co.:

A. Sales during the tax year is Br 2,320,000

B. The inventory account shows a balance of Br 520,000 (26,000 units @ Br.20 a unit) at the
beginning of tax year and the enterprise purchased Br 1,080,000.00 (50,000 units @ Br.21.60 a
unit) and Br 464,000.00 (20,000 units at Br.23.20 a unit) during Hidar and Yekatit 1998,
respectively. The enterprise uses periodic inventory system and 26,600 units are remaining on
hand as of Sene 30, 1999

C. Promotional expense of Br 83,000 was incurred which comprises Br 38,000 advertising

expense; Br 25,000 trading coupons and Br 20,000 entertainment expense.

D. Salary expense of Br 165,000 was incurred and composed of Br 100,000 basic salary; Br
25,000 provident fund contribution; Br 20,000 representation expense and Br 20,000 overtime
payment

E. Store Rent Expense of Br 240,000 was also incurred

F. Br 21,000 interest is paid on Br 100,000 principal amount of loan where the interest rate
between NBE and Commercial Banks is 9%

G. Penalties paid by the business is Br 1,360

H. Building has a cost of Br 500,000 and not fully depreciated during tax year 1999

I. Truck has a carrying amount of Br 120,000 on Hamle 1st, 1998.

J. Computers, Information System, Data Storage and Software have a balance of Br 69,000 on
Hamle 1st, 1998. During tax year the business enterprise acquired and disposed Br 32,000 and
39,000 assets, respectively

K. Br 80,000 award for outstanding performance was received from the government

L. the business incurred Br 100,000 expenses on behalf of the owners

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M. Donation of Br 50,000 was made by the business to charity organization with successful
achievement and transparent system.

N. Withholding income tax receivable has a balance of Br 23,800 at the end of tax year 1998

O. Br 50,000.00 loss was carried forward to tax year 1999

Required:
A. Prepare profit and loss statement for tax purposes assuming that the enterprise is a body and
use accrual basis of accounting for tax purpose for tax year ending Sene 30, 1998 as per
Proclamation No. 286/2002 and Regulation No. 78/2002

B. Prepare profit and loss statement for financial year ending Sene 30, 1998 for financial
accounting purposes assuming that the same cost and depreciation method as “A” above

C. Determine the non-deductible items and the related amounts

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6. Ato Nahome Hunduma rented his Land Cruiser Toyota at Br 15,000 for three months to
SS Tour and Travel Pvt. Ltd. Co. Required: Determine the income tax to be withheld by
the Payer SS Tour and Travel Pvt. Ltd. Co. and record the tax related transactions

Br 15,000 per month*3= Br 45,000

Other income tax =45000*0.15= Br 6,750

7. Ato XX deposited Birr 200,000 at prevailing Deposit rate (4%) at Commercial Bank of
Ethiopia at the beginning of the tax year 1997. If the deposit is in the account for two
years, determine the tax amount to be withheld by Commercial Bank of Ethiopia and
record the withdrawal of the sum after two years at the end tax year June 1998.

Deposit……………………… Birr 200,000

Interest rate ……………………………..4%
Duration …………………………………….2 year
Simple interest =Prt
=200,000*0.04*2
=16000
Income tax =16000*.15=2400

the tax amount to be withheld by Commercial Bank of Ethiopia is Birr 2400

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8. SI Business Enterprise sold its building which has a cost of Br 85,000 at Br 185,000. The
Building was held for 10 years and Br 11,000 Land and Building tax was paid on the
building during the 10 years period. If the average inflation rate is 5%, determine the
Taxable Capital Gain and the Capital Gain Tax.

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9. Ato Jara sold his personal home at Birr 150,000 in 1996 E.C. The home was accomplished
with the cost of Birr 95,000 in 1993 E.C. Determine the Capital Gain Tax assuming that the
person paid Br 2,200.00 Land and Building Tax and the applicable Prince Index is 1.25 in this
regard.

Selling price ………………………………………………………..150,000

Cost of building…………………………………………………….…95,000

Gross capital gain……………………………………………………..55,000

Land and building tax …………………………………………………..2200

Total deduction……………………………………………………….97,200

Taxable capital gain…………………………………………………….52,800

Capital gain tax(15%),,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, Birr 7,920

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10. Ato Abebe Purchased 100 Shares from NIB International Bank S. Co. at Birr 1100 per share
when the par value is Birr 1000 per share on January 1, 2003. Ato Abebe sold the shares at Birr
1700 per share on February 20, 2005. Taking year 2003 as a base year, the price index is 1.15
in 2005. Determine the tax on the Capital Gain

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