The Principles or Canons of Taxation

Adam Smith was the first economist who laid down four important canons of taxation which are the efficiency principals/canons of taxation to which were added few more by subsequent economists. Canons or principles of taxation are conditions or guidelines which a good tax system ought to fulfill. They include:

The canon of equality

The canon of equality, equity or justice is the most important canon of taxation. Smith explained it thus: “The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities, that is, in proportion to the revenue which the respectively enjoy under the protection of the State.” It means that every person should pay the tax according to his ability and not the same amount. It also means that everybody should not pay at the same rate. Rather, every taxpayer should pay the tax in proportion to his income. The rich should pay more and at a higher rate than the other person whose income is less. Thus this canon implies equality of sacrifice or ability to pay the tax in proportion to the income of the taxpayer.

The canon of certainty

According to smith, there should be certainty in taxation because uncertainty breeds corruption. By the canon of certainty he means that “the tax which each individual is bound to pay ought to be certain, and quantity to be paid ought all to be clear and plain to the contributor and to every other person.” Thus this canon requires that there should be no element of arbitrariness in a tax. It should be clear to every taxpayer as to what, when, and where the tax is to be paid. Nothing should be left to the direction of the income tax department. Certainly also means that the state should also be certain about the amount of tax revenue and the time when it is expected to flow in the exchequer.

The canon of convenience

This canon lays down that both the time and manner of payment should be convenient to the taxpayer. In the words of smith, “Every tax ought to be levied at the time or in the manner in which it is most likely to be convenient for the contributor to pay.” In India, the payment of land revenue is in keeping with this canon because it is to be paid after harvesting. Similarly, the payment of sales tax and excise duty by the consumer is also convenient because he pays these taxes when he buys commodities and at a time when he has the means to buy. The manner of payment is very convenient to him because these taxes are included in the prices of commodities.

The canon of economy

Every tax should satisfy the canon of economy in two ways. First, it should be economical for the state to collect it. If the cost of collection in the form of salaries of tax officials is more than what the tax brings as revenue, such a tax is uneconomical, and hence it should not be levied. Second, it should be economical to the taxpayer. It means that he should have sufficient money left with him after paying the tax. A very heavy tax on incomes will discourage saving and investment, and thus adversely affect the productive capacity of the community. Smith states this canon in these words: “Every tax ought to be so contrived as both to take out and to 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.”

The canon of productivity

According to this canon, a tax should be productive in the sense that it should bring large revenue which should be adequate for the government. But it does not mean that in its efforts to raise more revenue, the government should tax the people heavily. Such an effort would adversely affect the productive capacity of the economy. Further, this canon implies that one tax which brings large revenue is better than a number of taxes which bring small revenue. Many taxes may not be productive. They may also be uneconomical

The canon of elasticity

This canon is closely related to that of productivity. The canon of elasticity requires that the government should be able to raise the rates of axes when it is in need of more revenue. In other words, taxes should be elastic. The best example is excise duties. They can be levied on any number of commodities and their rates can be increased every year in order to raise more revenue. But care has to be taken that the rates of excise duties should not be so raised that they may encourage inflationary pressures in the economy.

The canon of flexibility

Flexibility in taxation is different from elasticity. Flexibility means that there should be no rigidity in taxation. The tax system can be changed to meet the revenue requirements of the state. On the other hand, elasticity in taxation means that the revenues can be increased under the prevailing tax system. But there cannot be any elasticity in taxation without flexibility because some change is required in the rates and structure of taxes if the state wants to increase revenue.

The canon of simplicity

The tax system should be simple, plain and intelligible to the common taxpayer. The tax system should not be complicated. It should be simple to understand as to how it is to be calculated and how much is it to be paid. The form/forms to be filled up for calculation and payment of a tax should be simple and intelligible to the taxpayer. This canon is essential in order to avoid ambiguity, corruption and oppression on the part of the tax department.

The canon of diversity

There should be diversity or variety in taxation. A single or a few taxes would neither meet the revenue requirements of the state nor satisfy the canon of equity. There should, therefore, be a variety of taxes so that all citizens should contribute towards the state revenues according to their ability to pay. There should be a variety of direct and indirect taxes. But a large multiplicity of taxes will be difficult to administer and hence uneconomical.

The canon of expediency

This implies that possibility of imposing tax should be taken into account from different angles i.e. reaction upon tax payers should also be taken into one should do what is convenient rather than what is morally right.

The Canon of Coordination

In democratic countries taxes are imposed by state, central state and local government and it is therefore desirable that there must be desirable coordination between different taxes imposed by different taxing is very much needed considering the interest of tax payer and government especially in democratic countries.

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