Taxation & its Canon’s (Principles)

A tax is a mandatory fee or financial charge levied by any government on an individual or an organization to collect revenue for public works providing the best facilities and infrastructure’. The collected fund is then used to fund different public expenditure programs. If one fails to pay the taxes or refuse to contribute towards it will invite serious implications under the pre-defined law.

For funding public works and services and building and maintaining the infrastructure in a country, funds are required by government to undertake these activities. For doing so, government collects taxes from its individuals and corporate residents to develop and build the economy. Thus, tax is nothing but an involuntary fee paid by individuals and corporation to a government which can be local, regional or national for financing the activities undertaken by it. This tax is collected by remitting a certain percentage of taxpayers’ earning to the government. The rate at which the tax is collected differs in various income groups.

Since tax is collected from various sources, it is majorly divided into direct tax and indirect tax. Direct tax refers to the tax levied on the income, profit or revenue, which is paid directly to the government. The general examples of this type of tax in India are Income Tax and Wealth Tax. Whereas, Indirect tax refers to the tax paid on goods and services, paid indirectly through a third party to the government some general examples of indirect tax include sales tax, Goods and Services Tax (GST), Value Added Tax (VAT), etc

 CANONS OF TAXATION

 Canons of taxations are the guiding rules and principle to make tax collection system effective and functional. The government has to build the structure that can make tax collection simple and effective. Therefore, certain rules and principles have to be followed in order to do the same. But any principle so framed or proposed would not be exhaustive. This is so, because of the dynamic nature of the society. A progressive society is always subject to the changes and these changes have to be adopted by the government in order to make the tax collection mechanism effective and efficient. Adam Smith gave four canons in his famous book named ‘Wealth of Nation’. These four canons are also called as the Adam Smith’s canons of taxations. Followings are the four canons of taxation:

  1. Canon of Equality:

Canon of equality states that the burden of taxation must be distributed equally or equitably among the taxpayers. However, this sort of equality robs of justice because not all taxpayers have the same ability to pay taxes. Rich people are capable of paying more taxes than poor people. Thus, justice demands that a person having greater ability to pay must pay large taxes.

If everyone is asked to pay taxes according to his ability, then sacrifices of all taxpayers become equal. This is the essence of canon of equality (of sacrifice). To establish equality in sacrifice, taxes are to be imposed in accordance with the principle of ability to pay. In view of this, canon of equality and canon of ability are the two sides of the same coin.

2. Canon of Certainty:

Taxation must have an element of certainty. According to Adam Smith, “the tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the amount to be paid ought to be clear and plain to the contributor and to every other person.”

The certainty aspects of taxation are: 

  • Certainty of effective incidence i.e., who shall bear the tax burden.
  • Certainty of liability as to how much shall be the tax amount payable in a particular period. This the tax payers as well as the exchequer should unambiguously know.
  •  Certainty of revenue i.e., the government should be certain about the estimated collection of revenue from a given tax levied.


3.Canon of Economy:

This principle suggests that the cost of collecting a tax should not be exorbitant but be the minimum. Extravagant tax collection machinery is not justified. According to Adam Smith, “Every tax has to be contrived as both to take and keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.”

Owing to the complex and ever-changing nature of taxation laws in India, government has to maintain elaborate tax collection machinery with a large staff of highly trained personnel involving high administrative costs and inordinate delay in assessment and collection of tax.

4.Canon of Convenience:

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.

Thus, it should be painless and trouble-free as far as practicable. “Every tax”, stresses A. Smith: “ought to be levied at time or the manner in which it is most likely to be convenient for the contributor to pay it.” That is why, after the harvest, agricultural income tax is collected. Salaried people are taxed at source at the time of receiving salaries.

These canons of taxation are observed, of course, not always faithfully, by modern governments. Hence these are basic and classic canons of taxation.

These are the four canons that were given by Sir Adam Smith but these four are not square, confining the principle of taxation. There can be others canons also and some of them are as follows:

5.Canon of Simplicity:

A simple tax structure must fetch or generate more revenue for the government. Where the whole of the tax structure is simple, it doesn’t create the confusion and is easy to understand. Tax rates must be simple. Where it is complex, it may lead to confusion and thereby the contributor may abstain from paying such tax. Canon of Simplicity along with the other canon plays a significant role in the effective and efficient functioning of the tax system. Goods and Service tax is one such example to encourage people to pay the tax without getting stuck into the technicalities of different tax. Goods and service tax has made the tax structure simple and productive.

6.Canon of Productivity:

According to a well-known classical economist in the field of public finance, Charles F. Bastable, taxes must be productive or cost-effective. This implies that the revenue yield from any tax must be a sizable one. Further, this canon states that only those taxes should be imposed that do not hamper productive effort of the community. A tax is said to be a productive one only when it acts as an incentive to production.

7.Canon of Elasticity:
Taxation should be elastic in nature in the sense that more revenue is automatically fetched when income of the people rises. This means that taxation must have built-in flexibility.
8.Canon of Diversity:

Taxation must be dynamic. This means that a country’s tax structure ought to be dynamic or diverse in nature rather than having a single or two taxes. Diversification in a tax structure will demand involvement of the majority of the sectors of the population.

If a single tax system is introduced, only a particular sector will be asked to pay to the national exchequer leaving a large number of population untouched. Obviously, incidence of such a tax system will be greatest on certain taxpayers. A dynamic or a diversified tax structure will result in the allocation of burden of taxes among the vast population resulting in a low degree of incidence of a tax in the aggregate.

9.Canon of Expediency:

This suggests that a tax should be determined on the ground of its economic, social and political expediency. For instance, a tax on agricultural income lacks social, political or administrative expediency in India and that is why the government of India had to discontinue it.

These canons of taxation are the real secret of the successful tax system. Non- fulfilment of these may demolish the whole structure and would create problems having only one solution i.e. following these aforesaid canons. But, we have to keep in mind that these canons are not exhaustive. With the passage of time, there may be an evolution of new canons which would be best suited to the circumstances of that time. Indian has a growing economy; therefore, new canons are obvious to evolve.

Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

If you are interested in participating in the same, do let me know.

Do follow me on FacebookTwitter  Youtube and Instagram.

The copyright of this Article belongs exclusively to Ms. Aishwarya Sandeep. Reproduction of the same, without permission will amount to Copyright Infringement. Appropriate Legal Action under the Indian Laws will be taken.

If you would also like to contribute to my website, then do share your articles or poems at secondinnings.hr@gmail.com

In the year 2021, we wrote about 1000 Inspirational Women In India, in the year 2022, we would be featuring 5000 Start Up Stories.

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