Canon of taxation

 INTRODUCTION:
Tax is a compulsory contribution by the people to the state to enable the state to discharge its political
responsibilities and duties towards the society.
By virtue of this definition “tax” becomes distinguishable from “Gift” or Donation on the one hand and
from “Fine” and “penalty” on the other.

 Meaning of taxation:
Funding of government expenditures

 Definition:
Taxation is a system by which a government takes money from people and spends it on government
machinery (things).
Or
It is the practice of collecting taxes (money) from citizen based on their earnings and properties.

 Classification of Taxes:
 Direct Taxes and Indirect Tax
 Flat, Progressive and Regressive

 Direct Taxes and Indirect Tax

Direct Tax:
Direct tax is a tax which is levied directly upon individuals or Firm. Like:-
o Income tax
o Wealth tax
o Capital gain tax

 Indirect Tax:
An indirect tax is a tax levied on goods and services. Like:-
 Sales tax
 Value added tax
 Custom duty
 Fuel tax
 Flat
 Progressive
 Regressive

 Definitions:
 Flat:
A flat tax means percentage (or rate) of tax remains same as income goes up. Like as Income tax on
companies

 Progressive:
A progressive tax means percentage (or rate) of tax goes up as income goes up. Examples: Income
tax on salaries

 Regressive:
A regressive tax means percentage (or rate) of tax goes down as income goes up. Examples: Sales
Tax
 Canons (Or Principles) of taxation
Canons or Principles of taxation means principles of a good taxation system from Administrative point of view.

 Adam’s Smith Four Maxims

 Canon of Equity:
The first among of them is that taxes should be levied with equity and uniformly so that each taxpayer may
contribute in accordance with his respective ability.
Taxes should be imposed on people’s ability to pay i.e. rich should be taxed more and poor should be taxed
less. It will ensure equal distribution of wealth in an economy.

 Canon of Certainty:
Secondly the amount of taxes which each individual is bound to pay should be capable of being ascertained
with reasonable certainty and should not be arbitrary.
Tax payer should be clearly informed as to purpose of tax, Time of payment, manner of payment and
amount of payment. There should not be a single element of uncertainty in tax.

 Canon of Convenient:
Thirdly, every tax should be levied in such a way that it is most convenient for the taxpayer e.g.
Property tax is paid when property is sold or purchased. Similarly, consumer taxes are paid when
consumer purchases the good.

 Canon of Economy:
Fourthly, expenses for collecting of taxes should be as low as possible. Tax is economical when the cost of
the collecting it small.

 Others principles for Good Taxation System:

Lambert’s Modern Principles of Taxation:
1. Taxation must be simple:
This means “simple” to you and me, not just to the tax profession. It should be noted that in this second
maxim, Adam Smith specifically requires that “The time of payment, the manner of payment, the quantity to
be paid, ought to be clear and plain to the contributor, and to every other person”.

2. Taxation must be certain both now and for future:

This means what it says, and is one of the reasons why tax reforms should be more of a constitutional issue,
commanding cross-party support than a party political football. The government must be prepared to
commit itself more than a year in advance.

3. Taxation must be neutral to production, to consumer spending and saying:

This may sound like an ideal, but nevertheless it is an ideal we must aspire towards. If we believe in a truly
free market economy, we must get government out of the market stop it disrupting and distorting the
market.

4. The cost of determination and collection of taxation should be the lowest possible:
The cost of tax collection shall be lower than amount collected. According Jean Baptiste Colbert’s famous
maxim that “The art of taxation consists of so plucking the goose as to obtain the largest possible amount of
feathers with the smallest possible amount of hissing”.

5. There must be no double taxation:

Double taxation occurs where you pay tax twice in respect of the same asset or sum of money

6. Taxation should be legally levied on the persons by whom it is economically borne:

Government tends to prefer to put taxes on intermediaries, such as banks, employers or retailers. However,
such taxes merely become hidden costs and the taxpayer is really misled about the tax he is bearing. If
 people really knew the true amount of taxes they were suffering, they would be more committed to tax
reforms and economy in public expenditure.

7. Taxation should be payable at times convenient to the Taxpayer :

This is reiteration of Adam’s Smith third Maxim. It’s almost universally breached. Far from trying to
accommodate the taxpayer’s business concern’s better, government tend to be very inflexible about
payment

8. The action by which references to which taxation is levied must correspondent with reality:
This should be enshrined in any country’s constitution. It requires the abolition and prohibition of all anti-
avoidance legislation that seeks to levy tax on the taxpayer according to the transaction which never took
place.

 Conclusion: