CANONS OF TAXATION

CANONS OF TAXATION

                   To begin with, we shall elaborate on Adam smith’s canons which are still used as the foundation of discussion on the principles of taxation. His canons are four altogether and the remaining five have been developed with the passage of time.

1.      CANON OF EQUALITY:  The word equality here does not mean that everyone should pay the equal amount of tax. That would be unjust generally it would benefit the economy if all the inhabitants could pay taxes i.e. apart from the indirect taxes. However, this is not possible as everybody does not fall within the tax-payers category. What equality reality means is that sacrifice of energy body has got to be equal so that the rich pay more and the poor pay less. The amount of tax paid has to be in proportion to the abilities of the tax payers.

2.      CANON OF CERTAINTY: Tax-payers ought to be aware of the purpose, amount and manner of payment. They should not be misled by tax-collectors as this would lead to aggravation and arbitrariness. Everything should be made clear and simple for the benefit of the tax payer. Uncertainty leads to corruption. Hence, publicity is usually given to budget proposals for discussion as well as criticism. Certainly the government wants to be accurate so that estimates of taxes to be levied and expected return is properly calculated.

3.      CANON OF CONVENIENCE: In the canon of certainty we maintained that there ought to be certainty in the time and manner of payment. However in this canon we say that both-element i.e. time and manner of payment must be convenient for the tax-payer so that he is able to pay his taxes in the time e.g. if farmers were to pay taxes on their crops before they were harvested, naturally they would not be able to do so. Consumers find it convenient in paying their taxes as such taxes are already included in the prices of the commodity and unless they are purchased they would not have to pay the tax.

4.      CANON OF ECONOMY:  What this canon means is that tax would be economical if the cost of collecting it is very small. The whole amount taken out of people pockets should go directly to the Treasury. There should not be any leakage in the way i.e. to say any form of corruption. This canon also means to say that the expenditure on tax collecting should be kept as low as possible and maximize the tax return. In another sense a tax would be economical if it does not hamper the economic progress.

          The following canons of taxation have come into existence with the passage of time through modern economists.

5.      CANON OF PRODUCTIVITY:  This canon means that production should be encouraged rather than otherwise. The productive capacity of the community should not be crippled or impaired. The government should avoid running into a deficit whenever possible. However, as we mentioned in an earlier chapter, deficit budgeting is not a bad phenomenon, it merely reflects that the government is in debt. Through canon of productivity it is better to have fewer taxes with large revenue rather than more taxes with less revenue.

6.      CANAN OF ELASTICITY:  This would depend upon the state of affairs prevailing in a country. “As a country’s needs arise, likewise revenue should also be increased otherwise it (i.e. revenue) will be inadequate, e.g. during the phase of war. Government expenditure must be-increased and likewise its revenue. That is why during war periods countries tend to suffer. A classic example of classic tax is income tax. Raising the rate up to small extent yields greater revenue.

7.      CANON OF SIMLICITY: This canon emphasizes that method of taxation should be made a simple procedure for the laymen to understand. It should be plain, non-technical and straightforward’. This will allow the layman to understand why he is paying tax. More important is that simplicity will avoid corruption which would take place if procedures were complicated. The amount and the purpose of taxation should be made clear.

8.      CANON OF DIVERSITY: According to this canon, taxation should be broad based i.e. to say there should be taxes of all kinds so that the whole community shares the burden. There should be variety of direct and indirect rates (for at least all those who are able to pay).