This article is written by Amber Kotnala and further updated by Moiz Akhtar. This article throws light on canons of taxation propounded by well known economist Adam smith and how these canons are even relevant today is discussed in detail.
Table of Contents
Introduction
In countries like India, taxes form the basis of infrastructures, developments and public benefit schemes run by the government as a whole. Taxes serve as the backbone of the national economy where public centric infrastructure like education, healthcare, roadways, food security etc. are powered and funded by the government. The government of India runs massive schemes in various sectors such as railways, transport corridors, freight corridors, energy infrastructure, indigenous pharma productions, indigenous manufacturing of various automobiles components, manufacturing of electronics and electricals etc. In all these developments, the Indian government has invested money collected through direct and indirect taxes.
The power of levying tax is conferred by Article 265 of the Indian Constitution. Article 265 states that only the authority of law has the power to levy and collect the tax. Therefore, it becomes the duty of every citizen to pay tax. The tax income collected goes to the consolidated fund of India i.e. Article 266 of Indian Constitution.
Payment of tax (Government’s Income) is not considered a burden to the citizens. As rightly said by Justice Homes of the US Supreme Court that “taxes are the price for civilization”. It is time that tax is no longer considered a burden but a price for civilization. For this, the government has to make tax collection so simple that citizens do not feel harassed or burdensome about it.
Let’s first understand what exactly does taxation mean before moving towards Adam Smith’s canons of taxation.
What is taxation
Taxation is an involuntary payment of levy that administration/government makes mandatory on its citizens. Generally, taxation doesn’t require any consent from the payer of tax, and there is also no direct service provided by the authority to taxpayers in exchange for the tax collected. Taxation or collecting a levy by the government/authority is legitimate, if the law of the land legitimises this collection. Governments have the control and power to levy, and collect different types of taxes from their citizens. From time immemorial, taxes have been levied on both physical assets such as land, housing as well as on the sales and transactions of goods.
After understanding the meaning of taxation let’s see why taxes are required to be levied all around the world!
Need for taxation
The 21st century is the era of technological advancements and financial upgrades leading to booming of various sectors of economies. The fiscal prudence and transparent tax policies adopted by a state reflects the economic philosophy of the government. In India, tax collection and levy is not a new idea, it’s been there for ages. Taxation is a fiscal tool used by the government since ages to run the administrative machinery of the state. To run administration smoothly the state requires resources and means. Tax collected from the citizens serves as a resource to the government.
Characteristics of canons of taxation
A good taxation system is the productive base of any economy. A good taxation system should reflect the view of a progressive economy. The framers of the taxation mechanism while framing the tax laws must keep in mind various needs of different sections of the society and frame laws accordingly. A good taxation system should be just and equitable to all so that the tax burden of the country is fairly distributed on all of its citizens. Fair distribution doesn’t mean equal distribution rather it means equitable distribution.
Although there are numbers of characteristics of canons of taxation, some among them are mentioned below-:
- The most important characteristic of a taxation system is that it should charge each and every individual according to its capacity to earn and spend. A person earning lower income should be subjected to a lower level of tax rates.
- Convenience to pay tax should be in an easy manner without much technical and procedural jargon should be made intrinsic to any tax framework.
- Simple and easy computation of tax liability is very crucial for a tax system to function well. The easier the method of tax computation, the more aware people become about tax policy functioning.
- A tax structure should be flexible enough to make exceptions for varied circumstances. The tax structure should be flexible to tackle situations like Covid-19 pandemic when the economy of the country hits a downline.
- One of the most important characteristics of a good taxation system is the diverse ways it uses to collect taxes in the country. The more diversified the tax structure, the less the people will feel the burden of paying taxes.
- The primary motive of a tax structure should be to frame such tax laws and policies which are not regressive towards the growth of the economy in general.
- If taxes are levied on purchase and expenditure then the structure of tax would get more diversified and wide.
- Taxing individuals on the basis of income they make is justified and is an advanced nuance in the sector of taxation. Most of the countries are charging income tax and have held that income tax should be the basis of a man’s ability to pay the tax.
- A tax should be logical enough for the taxpayers because an arbitrary tax without any cause or reason must not qualify as a tax. A tax imposed arbitrarily without any expedient cause will face severe criticism from the taxpayers.
- A good taxation system should be cost effective and the cost of collection should be meagre as compared to the amount of tax collected.
Now after getting a good idea on the meaning and need of taxation it would be easy for us to understand the other remaining part of the article.
Let’s now move towards the main topic of discussion which is the canons of taxation given by Adam Smith.
Adam Smith’s theory on canons of taxation
Before understanding the different types of canons of taxation let’s know who Adam Smith was.
Who was Adam Smith
Adam Smith was a Scottish philosopher whose views and ideas played a major role in the story of Scottish enlightenment. He was born in the year 1723 and was considered as one of the major proponents of classical liberalism. His views regarding economics and political philosophy took a hit worldwide when his book “The Wealth of Nations” was published in the year 1776. He was a student of both Glasgow University and Oxford’s Balliol College. The ideas he propounded were eventually accepted by almost all modern political systems.
His two main ideas were the free market economy and the invisible hand that regulates markets. According to him, the state’s intervention in the sphere of market and trade should be minimum so that the market could be able to function in an optimal manner where the growth is not limited by any of the policies of the state. He said that the economy of a country functions well when there is minimum or no interference by the political system of the country.
The crux of his theory of invisible hand was that, the market and sentiments of people are enough to determine the price of commodities and realisation of growth of the overall economy. People catering to their own needs and acting on self interest would lead to a situation in the market which would be beneficial for the economy and society as a whole. In his book ‘The Wealth of Nations’ he has also explained the canons of taxation which are integral for a modern taxation system and are inalienable features. These canons are adopted and implemented by many of the modern taxing economies including India.
Meaning of canon of taxation
Canons of taxation are the characteristics which a good system of taxation must possess. In order to be called a good taxation system, various characteristics such as equality in taxation, certainty in taxation, easy, and convenient taxation etc are much needed. While framing and carving out a detailed taxation system for its nation, a government should keep these canons of taxation in view.
After knowing about the person behind these canons of taxation, we will understand the four canons of taxation given by him.
Adam Smith’s canons of taxation
Canons of taxations are the guiding rules and principles to make the tax collection system effective and functional. The government has to build a structure that can make tax collection simple and effective. Therefore, certain rules and principles have to be followed in order to do the same. But any principle so framed or proposed would not be exhaustive. This is so, because of the dynamic nature of the society.
A progressive society is always subject to changes and these changes have to be adopted by the government in order to make the tax collection mechanism effective and efficient. Adam Smith gave four canons in his famous book named ‘Wealth of Nation’.
These four canons are also called Adam Smith’s canons of taxations. Following are the four canons of taxation:
- Canon of equality
- Canon of certainty
- Canon of convenience
- Canon of economy
Now let us deal with each canon in detail.
Canon of equality
Equality means treating everyone equal but here, the term equality is used with regard to the ability to pay. As considering everyone equal would result in payment of the large amount by the low-income group or payment of the same amount i.e. less, by the high-income group. While taxing the person, the government must know which person belongs to which income group and then the individual must be taxed.
Adam Smith argued that the taxes should be proportional to income, i.e. citizens should pay the taxes in proportion to the revenue which they respectively enjoy under the protection of the State. Adam Smith had rightly stated as this would reduce the gap between the rich and poor. If there would be no such principle, the gap between the rich and poor would only increase with time. In simple words, we can say that taxing the individual according to his ability to pay results in the equal distribution of wealth in the economy. Because of this principle of Adam Smith, the government has made the different tax slabs so that the sacrifice made by the individual in a monetary term shall be equal.
The purpose of the canon of equality is to provide a base for the taxation philosophy that a modern economy should reflect. Evolving economy should function on a taxation system which is just and rational to even the last person standing on the line of income. Equity in the taxation system promotes the overall socio-economic growth of a society as a whole. India is moving towards a nominal Gross Domestic Products (GDP) of 5 trillion dollars and it will achieve the numerical targets of GDP soon.
The future of a country depends upon the economic policies it adapts to make provision for the growth of different sectors of the economy and different classes of people. For the purpose of imposing and collecting taxes in India, taxpayers are categorised into different categories of annual income. Different categories of annual income have different tax slabs. Each tax slab represents a different percentage share of tax that one individual has to contribute according to the annual income they make. The higher the income, the higher the tax slab and tax percentage.
Categorisation of individuals into different tax brackets does justify the proportional taxation system that India follows but not having access to high end accounting services often leads to paying of more taxes by the lower income group of the country. Although purchasing power parity for two residents of India who belong to upper and lower tax slabs is the same , the disposable income they left with is disproportionate.
Types of taxes in India
In India taxes are categorised into two types -:
Direct tax
Direct taxes are the taxes levied by the government on the individuals and business entities whose burden and liability is on the assessee themselves. The person pays this tax by virtue of making an income in this country. This tax system is designed in such a way that the slabs of taxation are placed in a progressive manner due to which the share of tax increases as the income increases i.e. personal income tax. Direct taxes are collected by the central government directly and the Central Board of Direct Taxes (CBDT) is the regulating authority of this category of tax.
Examples of direct taxes include income tax, corporate tax, securities transaction tax, capital gains tax, gift tax and wealth tax. Rates of income tax in India are decided by the government for each upcoming year and are mentioned in the budget itself. The revision of tax rates compared to the preceding year is updated in the rules of income tax through making amendments to the Income Tax Act, 1961 and introduction of new finance legislations and circulars.
Updated and revised tax regimes as well as rebates are mentioned in the new Finance Act and the new Act replaces the previous Acts if any. Amendments to both Income Tax Act,1961 and related laws are being made throughout the year to make the tax model advanced and updated.
Following are the updated income tax rates applicable for Financial Year 2024-25 based on the Annual budget 2024-25 and Finance (No.2) Act 2024 -:
| Income tax slab (in Rs.) | Income tax rate (%) |
| From 0 to 3,00,000 | 0% |
| From 3,00,001 to 7,00,000 | 5% |
| From 7,00,001 to 10,00,000 | 10% |
| From 10,00,001 to 12,00,000 | 15% |
| From 12,00,001 to 15,00,000 | 20% |
| From 15,00,001 and above | 30% |
It is clearly witnessed from the above table that as the income of an individual increases the rate of tax increases. Further these taxes are applicable to people who belong to the income generating age (from 18-60). People belonging to the senior citizen group i.e. age 60 and above and the super senior citizen group i.e. age 80 and above have different taxation rates and deductions.
Indirect tax
Indirect taxes are the taxes which are levied by the government on the sales and purchases of goods and services. This tax is transferable in nature as it could easily be transferred to the other person in the chain of taxation system. For example, Goods and Services Tax (GST) could be easily transferred to the end consumer of the product and the consumer is liable to pay the tax. GST is considered as one of the biggest bulwarks of indian taxation system and it additionally generated revenue worth of Rupees 1.50 lakh crore in August 2024 which is 6.5% higher than Rupees 1.41 lakh crore which was collected in the month of August in 2023.
Examples of indirect taxes in India are VAT, GST, excise and custom duty etc. Although India has varieties of indirect tax and GST being the prominent one among them. After the implementation of GST, it has replaced many central taxes like additional duties of excise, central excise duty, excise duty levied under Medicinal and Toilet Preparations (Excise duty) Act 1955, additional duties of excise levied under textiles and textile products, additional duties of customs, service tax, surcharge and cess as well as central sales tax.
Whereas taxes levied by states like state VAT/sales tax, purchase tax, entertainment tax, luxury tax, entry tax (all forms), taxes on lottery (gambling and betting included), surcharges/cess and taxes on advertisement were also replaced by GST.
As far as indirect taxes are concerned, collection of indirect tax increased by Rs. 216946 Cr (20%) during the financial year 2021-2022 as compared to its previous year’s collection. The annual growth of the indirect taxes year-on-year which constantly decreased from 5.8% in FY-2018 to 1.76% in FY-2020 witnessed an upward trend in FY-21 and FY-22.
The growth of indirect tax has contributed to an increase in collection of GST and custom duty respectively. GST collection in the year 2022 has increased by 27% and Custom duty was increased by 48% as compared to FY-21.
During the covid years indirect taxes indirect taxes as a percentage of GDP declined from 5.35% in FY-18 to 4.76% in FY-20. However during FY-21 and FY-22 there was an increase in indirect tax to GDP ratio when it was increased to 5. 47% during FY-21 and FY-22. Indirect taxes are consumption based and are dependent upon the capacity of consumption of an economy and market.
Consumption is dependent upon macro-economic factors such as the Consumer Price Index (CPI) and the Wholesale Price Index (WPI) along with various other factors. After the Covid-19 pandemic growth of the Indian economy propelled and India witnessed a rapid recovery in the economic sphere. Strong economic recovery combined with better compliance efforts in taxation leads to the rise in indirect tax collection in FY-22.
Canon of certainty
Another important canon given by Adam Smith is the canon of certainty. According to him, ‘the tax which an individual is bound to pay ought to be certain and arbitrary’. The amount of tax, the manner of payment, and the person to whom it is to be paid shall be certain so that the individual shall be informed well in advance about the amount that is to be levied as a tax. If the tax system is not certain, it may lead to harassment of an individual.
This principle of certainty states that tax should not be arbitrarily fixed or imposed by the income tax authorities. Moreover, lack of certainty in the tax system, as pointed out by Smith, encourages corruption in the tax administration. Therefore in a good tax system, “individuals should be secure against unpredictable taxes levied on their wages or other incomes; the law should be clear and specific; tax collectors should have little discretion about how much to assess taxpayers; for this is a very great power and subject to abuse.”
The Indian taxation system is designed in such a way that each year’s tax slab, be it direct tax such as income tax or indirect tax such as GST is already being disclosed in the annual budget in the month of July. Although the final union budget is presented in the month of July in Parliament, the interim budget which contains the vision of the government for the upcoming financial year is presented in the month of February itself.
Budget is presented in the Parliament and broadcasted live to make the citizen aware of the financial planning programmed by the government and to gain insights on sector specific policies and investment planned to be executed. An aware citizen knows to which income bracket he/she belongs and could check as well as calculate the amount of tax he/she is liable to pay the government. The tax structure remains the same and constant for the whole year after declaration so that people could do business and financial planning according to the rates and slabs of the taxes declared by the government.
This eliminates all arbitrariness regarding the amount of tax one is liable to pay in the current financial year. Although the calculations and assessment of tax is simple in India, to claim deductions and rebates is quite complicated. Citizens often need the help of tax experts and professionals to claim them. Multiple heads of deductions and rebates motivate people to earn more and save tax on their income.
In other words, we can say, an individual who is paying tax, has to pay the same, in a complicated manner, shall restrain him in doing so because of the hardship and problems that he has to face while paying tax. Also, if an individual is unaware of the amount of tax to be deducted from his income in advance then he may get demotivated to do investment bearing high risk if he is a businessman. Therefore, the tax system must be certain and not arbitrary. Uncertainty along with arbitrariness would defeat the very purpose of the tax system.
Canon of convenience
Another important canon of taxation is the ‘canon of convenience’. As the word ‘convenience’ per se means to make it easy, simple, and comfortable. According to him, “every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it”. The payment and manner of payment of the taxable amount must be convenient to the person paying the same. If the tax collection mechanism is complex, it would lead to frustration and dissatisfaction to the contributor.
A good taxation system is one which is convenient to the contributor. Income tax is always collected in the preceding year of the assessment year. That means the tax is deducted only when the income is earned by the individual. If this would not be the case then the situation may arise, where the burden of paying the tax would be on the contributor, not having earned the income.
Income tax authority cannot tax the amount which is not earned. It may create an absurd situation, where tax is deducted on the amount, not in existence. Apart from this, another important aspect is, after earning income, how the tax collection must be done so as to make it convenient. The best example of this is Tax Deducted at Source (TDS). TDS means “deduction of tax from the source it has been generated”.
It is the obligation of the employer to deduct the tax before crediting the salary of the employee in his/her account and the tax so deducted shall be paid to the government, when due. This relieves the employee from paying the tax. Due to the rapid growth of technology, the internet has gained more popularity and is easily accessible nowadays. This gave rise to e-payment of direct taxes.
Income tax department assesses the amount of tax on the total amount of transactions made in a financial year on the assessee’s Permanent Account Number (PAN). Nowadays all the bank accounts are also linked to PAN and hence it is very easy for the income tax personnel to calculate the amount of total income and tax incurred on an individual or on any business in a financial year.
Individuals and businesses having more than one source of income might need the help of tax experts to file for their income tax return but computation of tax for salaried individuals is simpler and could be filed by the individuals themselves. If any extra amount of tax they had paid beyond their tax liability based on the income group they belong to in the previous year then, they could file for an income tax return. So, the convenience to pay tax and to file for tax return has become a lot simpler in India. Also payment of tax regularly reflects a clean and credible credit repayment capability of the individuals and businesses.
For making e-payment of taxes one should have only two things, an internet connection and a net banking enabled account in an authorised bank. If the taxpayer does not have a net banking enabled account, then he can make e-payment using a net banking enabled account of any other person but the tax should be paid in his name. What a contributor has to do is just to follow the procedure by logging onto the website of the Income tax department. All these things have made the tax collection mechanism convenient.
Further if any dispute arises between the taxpayer and the income tax department regarding the computation and calculation of tax then, one could visit the tax officer in the income tax office to resolve the matter. If the matter is not resolved under the tax officer then the taxpayer has the right to knock on the door of the tax commissioner and further appellate tribunal as well as the High Court also in the hierarchy of institutions. Hence, the claim of tax amount by the government on an individual or business is not final. There are institutions and courts where any aggrieved party can appeal for resolution of tax matters and seek relief.
Canon of economy
A good tax system is where the cost of collecting the tax is minuscule to that of the amount collected. The government shall always endeavour to lower down the expense incurred on the tax collection so as to have the larger amount to its treasury. The very purpose of tax collection is to generate revenue for the government but the same is defeated when the expense gets increased. To quote Adam Smith “every tax ought to be contrived as both to take out and keep out of pockets of the people as little as possible over and above what it brings, into the public treasury of the state.”
Therefore, this canon of taxation is significant in adopting the method of collection. As stated earlier, due to technological advancement payment of tax has become an easy task. From the point of view of the government, technology has reduced the expenses that would be incurred in case of absentia. Without technological advancement in a tax system, we cannot imagine how much a hefty amount the government may have incurred in the collection of tax.
Apart from Adam Smith’s canons of taxation, Charles F. Bastable the economist has also given us the modern canons of taxation. Adam Smith’s canons were the fundamental canons of taxation while these were added later in order to address the modern problems.
Modern canons of taxation
Canon of simplicity
A simple tax structure must fetch or generate more revenue for the government. Where the whole of the tax structure is simple, it doesn’t create confusion and is easy to understand. Tax rates must be simple. Where it is complex, it may lead to confusion and thereby the contributor may abstain from paying such tax.
The canon of simplicity along with the other canons plays a significant role in the effective and efficient functioning of the tax system. GST is one such example to encourage people to pay the tax without getting stuck into the technicalities of different taxes. GST has made the tax structure simple and productive.
Canon of productivity
Imposition of tax must not bypass the rule of productivity i.e. production in the economy. Tax amount shall not be arbitrarily fixed and imposed on the individuals, because this could discourage them to make further investment in the economy. But this does not mean the imposition of the tax in favour of the big shots of the country. The government shall impose the tax in such a way to make it productive i.e. yielding sufficient revenue.
A country only flourishes when the government allows the citizen to create private property for their personal benefits. Since India is a welfare democracy, it promotes the concept of welfare economy and welfare state. The Indian politico-economic system reflects a mix of capitalism and socialism. India aims for economic prosperity along with upliftment of society as a whole.
Canon of elasticity
Tax structure must be flexible enough that it moves along with the economic growth. When there is an increase in the people’s income, the revenue of the government shall increase. This is best applicable in case of indirect taxes. For example, the imposition of the high tax on high-end goods or luxury goods and services. Similarly, when there is a decrease in the income of people, the tax shall also be decreased accordingly.
The above explanation is best supported by an example of the Indian government’s move to put gambling, speculation and trading unregulated crypto currencies under 30% tax rate without any deductions. Luxury tax is also levied on the goods such as high end luxury cars, high end consumer electronics etc at 28% GST tax slab. Hence those who can afford luxury products are liable to pay higher tax amounts which are ultimately credited to the government treasury.
Canon of diversity
Canon of diversity states that there shall not be a single tax which has too high rates but shall have several taxes with lesser rates. This is so because an individual paying higher tax would lead to evasion of tax. The canon of diversity also encourages investments and leads to economic growth. Understanding better, in terms of human psychology, a person may abstain himself from paying a single high rated tax rather than from paying several lesser rated tax.
Another advantage of the rule of diversity is that imposing several low rated taxes will bring others, having low income, within the purview of the taxation system thereby leading to the contribution to the State treasury by a low-income group.
Canon of expediency
As per this canon the determination of the taxes should not be on the basis of political, social and economic expediency. There are some practical considerations which should be taken into account. The taxes have to be acceptable from all spheres like social, political and economic. This canon helps in winning the public acceptance and ensures that the taxes which are imposed are not unjust and do not burden the people of the country.
Are these canons of taxation given by Adam Smith still relevant in the modern tax system of India? Let’s move towards the next heading to know the answer for this.
Relevance of Adam Smith’s canons of taxation to modern tax system in India
There is no doubt that canons of taxation have helped the modern economy in many ways. Starting from the simplification of the taxation system so that more people would be willing to pay tax to the advancement in the technological sphere so that filings of tax returns should be hassle free and easy. Taxation system in India has changed significantly from the year 1991 when the Indian economy moved from a planned and domestic economy to an open market economy.
Adam Smith was a proponent of free market economy where the government has minimal interference. Taxation system in India was revolutionised so that it can cater to the growing needs of a market economy. In India, the taxation system was developed in such a way that it has many characteristics of the canons mentioned by Adam Smith. The planning and the finance commission always tried to make citizen centric tax laws so that it could be implemented without any complexities. Equitable taxation system, fair and certain amount of taxes to be paid, online payment of tax leading to easy payment are some of the characteristics of Smith’s canons which are adopted by Indian taxation mechanism.
Streamlining of indirect tax and implementation of GST lead to the elimination of cascading effects of tax and effective execution of Input Tax Credit (ITC). Effective implementation of tax rules and relevant laws are crucial for development of an economy. There are no countries in the world which satisfies all the canons of taxation, however the policymakers try to comply with the canons of taxation as much as possible. Good taxation system and transparency in collecting tax leads to more funds with the government.
With more funds the government easily caters to the needs of infrastructure and administration of the country. This makes it less likely to take debt or loan from other nations. This leads to lowering the debt portfolio of the government and makes the economy self-sufficient in the long run.
Although Adam Smith gave the canons of taxation nearly 200 years ago, it is fairly relevant in modern times too. Countries with modern economies incorporate these taxation principles given by Smith even today. These canons are relevant today and will be in future also because they are the fundamentals and classical features of a tax system.
Conclusion
These canons of taxation are the real secret of the successful tax system. Non- fulfilment of these may demolish the whole structure and would create problems having only one solution i.e. following these aforesaid canons. But, we have to keep in mind that these canons are not exhaustive. With the passage of time, there may be an evolution of new canons which would be best suited to the circumstances of that time. India has a growing economy, therefore, new canons are obvious to evolve.
As India is approaching the target of nominal GDP of $5 trillion, supporting business and income class people through various means and tax measures will not only create a positive sentiment among the citizens but also in the minds of foreign investors looking for investment opportunities in India. The whole world sees India as a potential dark horse in the realm of economy which could generate significant returns on investments.
Simplification of the taxation system and complying to the ideas of ease of doing business will only add up to the thrust that pushes the economy upward. Although the Indian taxation system has developed and upgraded to a much better level still, there remains a lot of progress to be made to cater to the high levels of financial transactions that are taking place every then and now.
Frequently Asked Questions (FAQs)
What is a tax incentive?
A tax incentive is a fiscal tool used by the government to reduce the tax rate or complete waiver of tax on a specific transaction or kind of business to promote and encourage it among the public. If a particular sector/business becomes tax free then, financial transactions under that sector would increase which will ultimately promote the business. Tax incentives and waivers are also provided by the government to specific industries if they are on the verge of collapse or showing a negative revenue for years.
What is GST?
Goods and Service Tax (GST) is an indirect tax reform which was introduced by the government of India through The Central Goods and Services Act, 2017. This was introduced to abolish and replace VAT (Value Added Tax) for the majority of the goods and commodities in India. GST simplifies the indirect taxation system for goods and services and the tax is computed at the end of the production when the consumer purchases the goods. GST has divided goods and commodities into five tax slabs i.e. 0%,5%,12%,18% and 28% respectively.
What is CBDT?
Central Board of Direct Taxes (CBDT) is a statutory body established in the year 1963 under The Central Boards of Revenue Act, 1963. The body is responsible for programming the structure of income tax department, framing of measures for collection and assessment of taxes, ensuring the implementation of policies to check tax evasion and tax avoidance, works related to grievance shell as well and inspection division etc.
What is an assessment year?
In India, for the purpose of tax collection convenience the time period from April 1st of current year to March 31st of next year is termed as assessment year. During this period whatever tax liability incurred upon the businesses and individuals are collected and their respective PANs are updated. At the end of the assessment year individuals and businesses are allowed to file for income tax return if they are eligible for the same.
What is the difference between direct and indirect tax?
Direct taxes are the taxes levied by the government on the individuals and business entities whose burden and liability is on the assessee themselves. The person pays this tax by virtue of making an income in this country. Whereas indirect tax are the taxes which are being collected on the goods and services the consumer purchase and use.
What is a TAN?
TAN stands for Tax Collection and Deduction Account Number which is issued by the income tax department to the businesses or persons who are responsible for tax collection at source or tax deduction at source. TAN is a 10 digit alphanumeric number consisting of four alphabets, five numbers and lastly one alphabet. TAN is mandatory for each and every deductor operating in India.
What is a PAN?
PAN stands for Permanent Account Number which is a 10 digit alphanumeric number allocated to tax payers by the income tax department. Through the PAN, the income tax department calculates and computes tax incurred on persons and businesses on the income they make.
What are the principles of good taxation?
Taxation is an integral part of a modern economy without which a country might not function to its optimum threshold. As far as the principles of a good taxation system are concerned, low cost of collection, simplicity in computation, easy payment of tax, proportional and progressive taxation, universal applicability of rates throughout the territory of the country, easy and accessible tax dispute remedies are some of the principles of a good taxation system.
Are Adam Smith’s canons of taxation absolute?
Adam Smith’s canons of taxation are not absolute, rather they are advisory and recommendatory in nature. They are a set of prescriptions to the policy formulation bodies who are involved in the formulation of tax structures. These canons help in policy formulation in such a way that the burden of tax is less felt in the mind of taxpayers.
What are other canons of taxation apart from Adam smith’s canons of taxations?
Other canons of taxation apart from Adam Smith’s canons are canon of simplicity, canon of productivity, canon of flexibility and canon of diversity. These canons are given by Charles F. Bastable.
Why are canons of taxation fundamental to any tax structure?
Canons of taxation are an indispensable part of any modern taxation system. They ensure that the tax mechanism functions in the most optimal way possible. These canons ensure that the tax system is designed in such a way, it reflects simplicity, transparency, justiciable, economically viable and lastly productive.
Why is the canon of simplicity important ?
Canon of simplicity plays a significant role in the designing the framework of a tax mechanism. It ensures that the tax system is less complicated and computation of the tax liability is easy to calculate. A simple and easy tax mechanism is always preferred over a complex and overly complicated tax computations structure.
What is the significance of the canon of diversity ?
Canon of diversity ensures that tax burden is spread across a number of different taxes rather than on a single individual tax. A single high rate of tax is detrimental and it can also hurt public sentiments. Further, it can create dissatisfaction regarding the single high tax burden incurred on individual taxpayers. Hence, it is always necessary to distribute the tax burden among a varied number of taxes.
References
- https://groww.in/p/tax/gst-rates
- https://incometaxindia.gov.in/Pages/about-us/central-board-of-direct-taxation.aspx#cbdtl
- https://www.geeksforgeeks.org/canons-of-taxation/
- https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2043805#:~:text=As%20on%2030th%20June%202024,on%2030%20thJune%202024
- https://pib.gov.in/PressNoteDetails.aspx?NoteId=151915&ModuleId=3®=3&lang=1
- https://www.pib.gov.in/PressReleasePage.aspx?PRID=2035618#:~:text=The%20Finance%20Minister%20informed%20that,4.9%20per%20cent%20of%20GDP
- https://cag.gov.in/en/audit-report/details/120360
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