According to Phillips Hardwick, “Taxes are compulsory transfers of money from private individuals, groups or institutions to the Government.”
Tax is a compulsory amount levied by the state on its individuals to meet the development and non-development expenditures of government.
Though taxation provides funds to the Govt. on one side and it curtails consumption and investment spending on the other side, yet it is considered a necessary evil.
According to ADAM SMITH, the following principle must be observed for a good taxation system.
Canon of Equality or Ability
Tax should be imposed on the basis of ability to pay the tax. By equality, we do not mean the same burden for lower income group and higher income group but by equality, we mean the ability to pay the tax. As a principle, it ensure
Canon of Certainty
The tax – payers must be certain about time, method of payment and amount of tax to be paid.
Canon of Convenience
By this principle, we mean that tax should be imposed at the time or in a manner which ensures the convenience of the tax – payers.
Canon of Economy
Tax should be imposed in such a way that we can get maximum collection with minimum expenditure.
Other Cannons of Taxation
Canon of Productivity
Imposing taxes ensuring maximum government revenue.
Canon of Elasticity
It should be elastic. The sense should be, Govt required high
On the other hand, while people facing hurdles any natural disasters or some economic crisis, the tax should be decresed.
Canon of Simplicity
Taxation system should be simple and there should be no ambiguity to both the parties. i.e. tax payer and tax payee. Otherwise, there is a risk of corruption.
Canon of Diversity
We should not concentrate only on the some selected sectors for taxation but this system should be diversified. Maximum sectors should be brought in the network of taxation.
Canon of Impartiality
Taxation system should be impartial i.e. the two men earning the same income have to pay the same amount of tax. In other words, the incidence of tax should be equal for each of them.
Canon of Harmlessness
Taxation system should be harmless in the sense that tax rates should not be so higher that production and investment become unattractive and profitless. Rather tax system should be framed in such a manner that it provides incentive to the people of the country to invest and work hard for their own prosperity as well as for the development of whole nation.
Canon of Economic Development
Taxation system must provide the guarantee of economic development. It should increase production, employment, economic growth, etc.
Canon of Balance
A balance must be maintained between direct and indirect taxes.
Canon of Price Stability
Taxes should be managed in such a way that level of prices must be stable. There should be no fluctuation in prices due to taxes.
Canon of Adjustability
Taxation system should be adjustable according to the changing requirements.
Canon of Equitability
Taxation system should perform in such a way that inequalities of distribution of wealth among the community of the country can be minimized. Taxation system should minimize the gap between the rich and the poor by the introduction of taxes which ensure equitable distribution of wealth.
Canon of Moderation
Principle of moderation should be strictly observed so that neither the tax-payer should be heavily burdened nor he should be almost free from national responsibility of paying the tax.
While observing mentioned canon of taxation, we understand that it reveals that economy should enjoy ideal taxation system.