Canons of taxation

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Meaning of canons of taxation Canons of taxation refer to the characteristics or qualities which a good tax system should possess. They relate to the administrative part of a tax. It should be noted that modern governments apply these cannons while imposing and collecting taxes.

Types of canons of taxation These are as follows:

(a) Canon of equality Canon of equality states that the burden of taxation must be distributed equally or equitably among the taxpayers.

However, this sort of equality robs of justice because not all taxpayers have the same ability to pay taxes.

Rich people are capable of paying more taxes than poor people. Thus, justice demands that a person having greater ability to pay must pay large taxes.

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). To establish equality in sacrifice, taxes are to be imposed in accordance with the principle of ability to pay. In view of this, canon of equality and canon of ability are the two sides of the same coin.

(b) Canon of certainty The tax which an individual has to pay should be certain and not arbitrary.

 

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Not only taxpayers should know when, where and how much tax is to be paid. In other words, the certainty of liability must be known beforehand.

Similarly, there must also be certainty of revenue that the government intends to collect over the given time period. Any amount of uncertainty in these respects may invite a lot of trouble.

(c) Canon of economy This canon implies that the cost of collecting a tax should be as minimum as possible.

Any tax that involves high administrativecost and unusual delay in assessment and high collection of taxes should be avoided altogether.

(d) 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 practicable.

 

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Canon of productivity According to a well-known classical economist in the field of public finance, Charles F. Bastable, taxes must be productive or cost- effective.

This implies that the revenue yield from any tax must be a sizable one. Further, this canon states that only taxes that do not hamper productive effort of the community should be imposed.

tax is said to be a productive one only when it acts as an incentive to production.

(f) Canon of elasticity Modern economists attach great importance to the 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.

Whenever the government needs money, it must be able to extract as much income as possible without generating any harmful consequences through raising tax rates. Income tax satisfies this canon.

 

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Canon of simplicity Every tax must be simple and intelligible to the people so that the taxpayer is able to calculate it without taking the help of tax consultants.

A complex as well as a complicated tax is bound to yield undesirable side-effects. It may encourage taxpayers to evade taxes if the tax system is found to be complicated.

A complicated tax system is expensive in the sense that even the most honest educated taxpayers will have to seek advice of tax consultants. Ultimately, such a tax system has the potentiality of breeding corruption in the society.

(h) Canon of diversity Taxation must be dynamic.

This means that a country’s tax structure ought to be dynamic and diverse in nature rather than being narrow and rigid. Diversification in a tax structure will demand involvement of the majority of the sectors of the population and must evolve