CANONS OF TAXATION

INCOME TAX LAWS

FINAL PROJECT

GROUP MEMBERS
Muhammad Haris

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Muhammad Ahsan Azhar

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Muhammad Usman Shahid

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Khwaja Muhammad Awais

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Muhammad Fahad Khan

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CANONS OF TAXATION

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CANONS OF TAXATION

A good system of taxation must satisfy certain general principles. Adam Smith laid down
the following four canons of taxation.
(1)

Canon Of Equality:

This is the most important canon of taxation. Equality or equity means that every tax
payer should contribute towards the support of the government according to his ability
to pay. This does not mean that all people rich or poor should pay equal tax or at equal
rate. Equality means equality of sacrifice. The equality of sacrifice can only be
maintained when the rich are required to pay tax at a greater rate than the poor people.
(2)

Canon of certainty:

This canon says that everything about a tax should be definite and certain. According to
this canon there must be certainty about the time of payment, the manner of payment
and the quantity to be paid. It will give greater confidence to the government about its
estimates and that the tax payer will also feel certain about his budget. Uncertainty
encourages corruption.
(3) Canon of convenience:
This canon implies that every tax ought to be levied at the time or in the manner in which it
is likely to be most convenient for the contributor to pay it. If a tax is convenience, the
payer will pay it at the proper time without reminder. For example a person drawing a
monthly salary likes to pay at the time of receiving his salary every month.
Canon of economy:
This canon implies two things. Firstly, the cost of collection of a tax should be small in
proportion to yield. Secondly, the tax must not obstruct in any manner the economic
development of the country. If a tax is contrary to these two principles it is regarded as
costly and uneconomical.

equality (based on a persons ability to pay), certainty (the time for payment,
manner of payment and quantity to be paid should be clear), convenience
(payable at the time the taxpayer is in receipt of income) and economy in
collection.

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OTHER CANONS:
Besides these canons of taxation, there are four other important principles of taxation.
They have been added by later economists. They are as follows:
(5) Canon of Productivity:
It means that taxes should yield sufficient revenue to the government. A few tax which are
fairly productive are much better than a large number of taxes which not so productive.
(6) Canon of elasticity:
This principles means that tax system should be capable of expansion and reduction
according to the requirements of the state. Taxes which in case of need can be conveniently
increased in amount without any additional cost of collection are considered to be good
taxes. Income tax is a very good example of an elastic tax.
(7) Canon of simplicity:
The system of taxation should not be complicated and difficult to be understood by an
average person. The basis of tax and method of calculation should be simple, plain and
intelligible.
(8) Canon of Diversity:
This principle says that a large variety taxes is always preferable to a small number. Every
tax has some defects. In a varied tax system, different taxes tend to cancel to each other.
Variety is also desirable from the point of view of yield, stability and justice.

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Meaning and Types of Taxes

MEANING:
A tax is defined as "A compulsory contribution which the citizens make to the state for the
support of the government"
The state does not promise any direct proportionate benefit to be given to those who are
made to pay the taxes. It must be understood that a tax is a compulsory contribution which
must be made. There is no escape from payment of a tax except through illegal means and
further those who are made to pay tax should not expect to get any special benefit from the
government in proportion to the amount of tax paid.
A tax is imposed on certain basis. If the basis of the tax is the income of a person, this would
be called as an income tax. Similarly there are other taxes like property tax or wealth tax.
TYPES OF TAXES:
Sometimes, a distinction is made between various taxes on the basis of the changes in the
tax rates. According to this criterion there are three forms of taxes. These forms are
discussed as under.
1. Direct Tax
If impact and incidence of a tax is on the same person, it is called a direct tax. In other
words, all such taxes the burden of which cannot be shifted on to other persons are called
direct tax. E.g. income tax.
2. Indirect Tax
If impact and incidence of a tax is on two different person, it is called an indirect tax. In
other words, all such taxes the burden of which can be shifted on to other persons are
called indirect direct tax. e.g. Sales tax.

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ADVANTAGES OF DIRECT TAXES

Direct taxes are preferred due to following advantages
(1)

Economical:
The main advantage of direct taxes is that their cost of collection is very low as
compared to revenue that they yield.

(2) Certainty:
These taxes are of a certain nature and therefore government can easily estimate the
amount of revenue that it is going to get by imposing them.
(3) Equitable:
Direct tax are more equitable because the principle of progressive taxation can be easily
applied to them.
(4) Elasticity:
Direct taxes are elastic in nature and therefore their yield can be easily raised by slightly
changing the tax rate.
(5) Awareness:
Direct taxes create awareness among those who pay the taxes. This is because they are
conscious of the contribution which they are making to the revenue of the government.
These people usually become more responsible citizens.

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DISADVANTAGES OF DIRECT TAXES:

There are also certain disadvantages associated with the direct taxes. These drawbacks are
as under.
(1) Inconvenient:
These taxes are very inconvenient because the person who pays such tax feels the direct
tax feels the pinch of such tax.
(2) Reduced Saving:
Heavy direct taxes reduce the saving capacity of the people. They are a disincentive for
further investment.
(3) Tax Evasion:
These taxes can easily be evaded by submitting false returns or by bribing the tax officials.

ADVANTAGES OF INDIRECT TAXES

The chief merits of indirect taxes are as follows.
(1) Convenient
These taxes are normally included in the prices of the commodities; therefore they are
convenient to pay. Further these taxes do not pinch the consumers very much because they
are included in prices.
(2) Less Evasion
As these taxes are included in the price of the commodities there is no possibility of evasion
in the case of indirect taxes.
(3) Resource Allocation
Indirect taxes can help government to allocate scarce resources in a desirable manner. For
this purpose heavy taxes on luxury and undesirable goods can reduce their consumption,
and resources can be diverted to the production of other commodities demanded by the
people.
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DISADVANTAGES OF INDIRECT TAXES:

There are certain drawbacks of indirect taxes. These are discussed as under.
(1) Regressive In Nature:
Indirect taxes are usually regressive in character. A rich man and a poor man buying the
same commodity have to pay the same amount of the tax. Therefore such persons place
same burden upon the poor than the rich.
(2) Uncertain:
The revenue from such taxes is usually uncertain. When a tax is imposed upon a tax its
price goes up leading to fall in its demand. Therefore uncertainty is created regarding he
expected revenue from such taxes.
(3)Uneconomical:
Such taxes are usually uneconomical. It is because the cost of collection is high, because a
good deal of expenditure on administration is involved for its collection.
FBR Report
The FBR collected Rs 378.656 billion as direct taxes and Rs 623.853 billion as indirect
taxes up to April 2010 of the current financial year as against Rs 323.768 billion as
direct taxes and Rs 554.832 billion as indirect taxes in last year, showing an increase of
17 percent and 12.4 percent respectively. Similarly the FBR has collected Rs 408.856 billion
as Sales Tax up to April 2010 against Rs 351.422 billion in same period of last fiscal year
showing an increase of 16.3 percent. Staff report

DOES Pakistans taxation system promote or retard manufacturing growth? Is it

industry-friendly? And one final question: Is the tax burden fairly distributed?
The taxation system is not fair in the sense that it does not raise revenues proportionate to
the incomes generated by different sectors of the economy. This was the virtual consensus.
More than 60 per cent of the revenue is contributed by the manufacturing whose share in
the GDP has remained stagnant for decades at around 17/18 per cent.

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Businessmen did not mince words when calling the taxation structure, retrogressive,
exploitative, inflationary and expansionary that alienates a section of society by creating
in them a feeling of being discriminated against, while others are treated as favorites.
Pakistans taxation structure manifests deep mistrust between the government and the
businessmen observed a business leader while pointing out to the load of withholding and
presumptive tax that constitute almost 90 per cent of the taxincome tax.
The slump in the exports in the first quarter of this fiscal year is the direct outcome of the
taxation which pushed up production cost to a level where our exports are gradually
becoming uncompetitive and foreign products are flooding the domestic market,
Tax recovery went up by roughly 11 per cent every year in the last six years, but the tax-toGDP ratio remained dismally low at 10 per cent of the GDP. What does this mean? It
means that tax is not being recovered from all sectors of the economy.
A crippling tax burden on a few sectors is leading to expansion of black economy and is
reducing social acceptability of the tax system. It is time to develop a tax structure based on
equity that would increase revenues and spur economic growth.

Procrastinating on VAT
VAT is a well known source of revenue and it has several advantages from the point of view
of the tax collector. It is, however, a regressive tax, like all other indirect taxes. It is levied
on all transactions and is also known as goods and services tax (GST) in some countries
including Canada and New Zealand. On the face of it, VAT on goods would be based on a
simple calculation: to adjust the cost of inputs to the value of the final output and impose
the tax on this value added. In the case of services, the value added for the consumer is
from whole range of services and would be subject to tax from the accountant, to candlemaker, to lawyer, to the woodworker.
In the context of the above factors, the proposed VAT will face some very difficult
challenges in Pakistan, which is not an integrated market economy owing to existence of
disguised unemployment and fragmentation of work, giving rise to informal sectors.
It is amazing that in the low-level economy, the degree of individual wealth has multiplied
several folds. Conspicuous consumption is rampant. The wealthy like the poor have always
been with us, but relative to everyone else, they are today wealthier and more conspicuous
in the display of their prosperity. There is wealth, lots of it. Where does it all come from?
Islamabad, June 8 (IANS) The International Monetary Fund (IMF) has stopped the release
of loans to Pakistan till the imposition of Value Added Tax (VAT), leading to the
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withholding of $1.15 billion, including budgetary support of $363.7 million.

The IMF has told Pakistan not to expect the release of loans unless VAT is imposed, Online
news agency reported, quoting sources.
After GST, now a new Frankenstein is about to suck whatever life is left in the veins of
emaciated Pakistanis. Prime Minister and his cronies are saying that the Value Added Tax
(VAT) is just a sweet GST, and wouldnt have much effect. Yes, it wouldnt have much effect
on the Pir of Multan, his boss and their acolytes, who only know how to count in billions.
A newspaper report says that the THE IMF is so insistent on the imposition of a Value
Added TAX (VAT) that it has relaxed the targets it had set for Pakistan to achieve in the
next financial year, 2010-11, including the target for the budget deficit as a percentage of
the GDP. It must not be assumed that the IMF has abandoned anything, just that it hopes to
achieve the results it had intended from the original targets, from the imposition of the
VAT. Those results include the economic subordination of Pakistan, so that it continues to
be dependent on IMF handouts, and continues to toe the US line generally, but particularly
in the War on Terror.
IMF Claims VAT-Fruitful: Explaining Pakistans $7.6 billion loan repayment schedule,
Ross informed that the country would require repaying the IMF loan in eight installments
starting from February 2012 to 2014 based on repayment amount on Special Drawing
Rights (SDR).
Local Experts in Against: As the Government is mulling to replace General Sales Tax (GST)
with Value Added Tax (VAT) from the start of the next fiscal year at the rate of 15 percent
and its total impact will be 21 percent on the consumers, as it will cover the total supply
chain till end consumers.
It may be mentioned here that Government has kept the inflation rate at 8 percent for
2010-11, which is still hovering around 13 percent, and after imposing VAT it will be
difficult for it to achieve the said target. Due to fear of soaring inflation due to imposition of
VAT, Senate Standing Committee on Finance had already asked the Government to start
VAT rate from 12 percent.

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Tax us till we die, fool us till you can

The next time you see President Zardari or Prime Minister Gilani in their fifty-car
entourage, think two things Peoples Government and taxes. As the months pass, these
two have become synonymous. But only for Pakistans taxpaying community a distinct
minority in a country where not one person has ever been jailed for tax evasion.
All tax evasion cases until now are politically motivated. The right people in jail for the
wrong reasons. It is a status symbol amongst our elite to evade taxes and at the same time
milk the government. The challenge before any government in power, therefore, is to raise
money in taxes as much as possible, so that the elite can live off it.
The IDP tax and the carbon tax are only excuses by a pitiful government to extract more
money from lower- and middle-income groups. Nowhere in the world does a government
look for new and more innovative ways to tax its people on the one hand and not be able to
account
for
how
this
will
be
spent.
Instead of looking at ways to cut down expenditures, the government of Mr Gilani is
looking at ways to raise income. Wasteful expenditure continues to be the order of the day.
Money is spent less on addressing basic issues of the people and more on making our
ministers
richer
and
our
MNAs
better
off.
Come out of the restaurant and on to the street and you will see a number of things. First, if
you are in a posh locality, invariably there will be several government number-plate cars,
most of them parked in a manner that obstructs traffic. These vehicles, driven by politicians
and bureaucrats and their offspring, have been bought with your taxes. The drivers and
guards that are accompanying these cars are also paid for by peoples taxes.

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Statistics
According to FBR these are the number of recipients who pays taxes and the growth of tax
after collection:

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No relief for the poor

Poverty is rampant in Pakistan. There are now more than 60 per cent of people living
under $2 a day. This figure is a bit lower than for the neighboring India, but that country is
blessed with several leading sectors in the economy, each with its potentially extensive
linkages with the rest of the economy. Also, their infrastructure is stable.
You will also see that the number of beggars has increased on the roads. These are a
combination of genuinely hard-up people and professionals. Either way, they represent a
failure of the government. Poverty and population are the two things that continue to rise
in Pakistan.

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Conclusion
All governments impose both direct and indirect taxes for raising the revenue necessary to
meet the public expenditures. The government should keep in mind the limitation of both
type of taxes and impose them only to that extent that they yield maximum revenue with
the minimum of burden on the community especially the poor class who are facing this
menace.

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