CHAPTER SIX

DOUBLE TAXATION

Today, with enormous range of expenditure outlays, the Governments cannot depend upon a
single tax. Because it will not provide sufficient revenue to meet their financial needs. Moreover,
with the single tax, the Government cannot achieve the principles of equality, ability to pay and
equitable distribution of income and wealth among the people. Thus, the principle of multiple
taxation is recommended whereby the Government may resort to various direct and indirect
taxes to attain their objectives both fiscal and social.
But such multiple taxation should not lead to double taxation. Double taxation occurs when the
Government levies taxes on the same base in more than one way. Hence, double taxation can be
defined as, “taxation of the same tax base twice either by one authority or by different
authorities”. Here, the two taxes should be levied with reference to the same period.
Examples of Double Taxation:
1. Mr. X earns his income in Etiopia and U.S.A. If both the Governments levy taxes on his
entire income, it is considered as double taxation i.e. international double taxation,
because he has to pay tax in two countries on the same income.
2. The Government of a country levies taxes on the profits of a company before the
distribution of dividends. Thereafter, it taxes the individual shareholders on the dividends
received by them. Then it becomes a double taxation. Here the company and shareholders
are taxed on the same income.
Hence, double taxation means, taxing the same tax twice and it may be of international or federal
double taxation.
Kinds of Double Taxation:
Double taxation can be classified on the following ways:
1. Double Taxation by different authorities.
2. Double Taxation by the same authority.
The components of these kinds are explained with the chart given in Fig.1.

Kinds of Double taxation

Double Taxation by the same

Authority

International Federal 1. Taxation on capital and

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 Double Double income.
Taxation. Taxation. 2. Taxation on both debtors
and creditors for the
1. Taxes levied 1.Taxes levied by amount of loan.
by the govt. of two two Govt. of the 3. Taxation on profits before
different countries same country ie distribution and on dividends
Union & States. after distribution.

Let us explain these kinds one by one.

1. Double Taxation by Different Authorities: When the same tax base is levied by two
different taxing authorities either international or federal, it becomes a case of double taxation.
(a) International Double taxation: This type of double taxation occurs when the
Governments of different countries levy on the same tax base. The scope of a tax determines the
incidence of its burden. It includes both direct and indirect taxes. Generally the income tax,
wealth tax and customs duty cause such international double taxation.
(b) Federal Double Taxation: This kind of double taxation occurs when the Governments
within a country levy tax on the same base. When the Union Government and State Governments
of a country levy tax on any one tax base, it is called federal double taxation.
2. Double Taxation by the Same Authority: Such a double taxation occurs when a
Government either Union or State levies on the same tax base twice. The tax on capital and
income, debtors and creditors on the amount of loan, on the profits before and after distribution
and the like are the notable examples in this regard.
7.3. Effects of Double Taxation:

Generally, double taxation is not liked by the taxpayers and is highly criticised by the
economists. It will affect the economy of the country directly and indirectly. The main effects of
double taxation are given below:
1. Injustice to the Taxpayers: Double taxation causes injustice to the taxpayers. It
discriminates among the different taxpayers.
2. Does not Conform to the Principle of Ability to Pay: In case of double taxation, the tax
system does not conform to the principle of ability to pay. Because when both the Central and
State Governments tax the same group on the same tax base, the principle of ability to pay is
violated.
3. Does not Ensure the Principle of Equity: When the Union and State Governments levy
taxes on the same commodities especially on the necessities, it will broaden the gap between the
rich and the poor. Thus, the double taxation violates the principle of equity also.
4. Discourages the Ability to Work, Save and Invest: Double taxation increases the price
of the commodities and leaves the people with lower disposable income. This in turn affects the
standard of living of the people and thereby reduces their ability to work, save and invest.

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 5. Discourages the Small-scale Industries: When the taxes are uniformly levied without
any exemption to small-scale sector, the competitive efficiency of them will be affected. Because
of a rise in their prices, they cannot compete with the large-scale industries in the market.
6. Discourages Exports: It may be due to federal double taxation. When the same
commodities are taxed both by Union and State Governments, their price will automatically be
increased which in turn affects the export market.
7. Affects the Overall Economic Development of the Country: Since double taxation
affects the individual economic activities, the whole economic development will be affected. In
such a situation, the Government cannot use the taxation as a weapon, boost the sick industries
and to curb the effects of trade cycles in the economy.
Remedies for Double Taxation:

To remove the effects of double taxation, the following remedial measures can be adopted.
They can be classified on the following two categories:
Remedies for the Problem of International Double Taxation:
(a) Agreement for Mutual Exemption: The countries may enter into an agreement to
exempt the income of non-residents when they take the income outside.
(b) Basis for Incidence: The double taxation can be avoided when the taxes are levied either
on residential status or on citizenship and not on the both.
(c) Special Measures: Some special measures should be devised so that the Governments of
two countries may tax different parts of the income earned by a person.
Remedies for Internal or Federal Double Taxation:
The following are the remedies to avoid internal or federal double taxation:
(a) Separate List: There should be a separate list of taxes that can be levied by the Union
Government and State Governments.
(b) Co-ordination between the Fiscal Policies: There should be a perfect co-ordination
between the fiscal policies of the Union and the State Governments. And the problem of double
taxation can be solved through the centralization of finance. This can be done by getting the final
approval from the Central Finance Minister for the State budgets.
(c) Avoiding Overlapping of Taxes: There should not be any overlapping of taxes. The
problems of double taxation can be solved to a considerable extent if due consideration is given
in this regard. To avoid the double taxation caused by overlapping of sales tax and excise duties,
they may be replaced by a centrally administered value added tax.
In Ethiopia, the problem of double taxation is considerably reduced because of the provisions
made in the Ethiopian Constitution. Articles 96, 97, 98, 99, 100, 101, and 102 of the
Constitution, there is a separate list for the Federal Government, State Governments and
Concurrent List. There are specific Articles for revenue sharing and principles of taxation.