Week – 1

A. Ingredients of a tax

1) Not voluntary / Enforced contribution

2) Payable in cash

3) Proportionate in character

4) Levied for public purposes

5) Levied by the law-making body

B. Purpose of taxation

1) Revenue for the government

2) Non-revenue or regulatory – for eg. Charging higher tax on import of certain goods for protection of
domestic industries.

C. Types of taxes

1) Direct Tax – A direct tax is that tax whose burden is borne by the same person on whom it is levied.
It is based on the income and property of a person. For example, income tax, wealth tax, property
tax, gift tax.

2) Indirect Tax – An indirect tax is that tax which is initially paid by one individual, but the burden of
which is passed over to some other individual who ultimately bears it. It is levied on the expenditure
of a person. For example, sales tax, GST, custom duty, excise duty, VAT.

D. Canons of taxation

By canons of taxation, we simply mean the characteristics or qualities which a good tax system should
possess.

1) Canon of Equality: It states that the burden of taxation must be distributed equally or equitably
among the taxpayers. 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). Taxes are to be
imposed in accordance with the principle of ability to pay.

2) Canon of Certainty: The tax that an individual has to pay should be certain and not arbitrary. The
time of payment, the manner of payment, the quantity to be paid must be clear to the contributor and
to everyone.

3) 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 possible.
 4) Canon of Economy: This canon implies that the cost of collecting a tax should be as minimum as
possible. Any tax that involves high administrative cost and unusual delay in assessment and high
collection of taxes should be avoided altogether.

5) Canon of Productivity : Taxes must be productive or cost effective. It is much better to have a few
taxes which yield good revenue instead of many taxes yielding a little.

6) Canon of Simplicity : The canon of simplicity aims to avoid corruption and tax evasion y making
the entire method simple and easy. Every tax must be simple and intelligible so that the tax payer is
able to calculate it without taking the help of tax consultants. A complex as well as complicated taxes
bound to yield undesirable side effects. It may encourage taxpayers to evade taxes if the tax system is
found to be complicated.

7) Canon of Diversity: Being heavily dependent on a single tax source can be detrimental for the
economy. Canon of diversity states that it is better to collect taxes from multiple sources rather than
concentrating on a single tax source. Diversification in a tax structure will demand involvement of
the majority of the sectors of the population.

8) Canon of Elasticity: This Canon implies that a tax should be flexible or elastic in yield. It should be
levied in such a way that the rate of taxes can be changed according to exigencies of the situation.

E. Incidence and Impact of Tax

The impact of a tax falls upon the person from whom the tax is collected and the incidence rests on the
person who pays it eventually. For example, suppose a tax — excise duty — is imposed on soap. Its impact
is on the producers, in the first instance, as they are liable to pay it to the government. But the producers may
succeed in collecting it from the consumers by raising the price of soap by the amount of tax. In that case,
consumers eventually pay the tax and so the incidence falls upon them.