Canons of Taxation

Basic Principles of Taxation

Tina S
Tina S
Nov 27, 2009
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The term “taxation” comes from Latin word “Taxation”. It means too determine he payable quantum on estimate. Taxing authority determines tax to be payable by the assesse. So Tax is the revenue collected by the Government from persons and organizations under different taxing Acts. In other words, it is a liability imposed upon the assesse who may be individuals, groups of individuals and other legal entities.
A charge imposed by a government on a service, product, or activity in order to raise revenue. Tax can be levied on business or personal income.

According to Justice Holmes, the price to the Govt. for living in a civilized society is the tax.
According to Taylor, taxes are the compulsory payments to Government without expectation of direct benefit to the tax payer.

A tax system in order to achieve its various objectives, needs to adhere certain principles. But in view of the fact that the objectives of taxes are many and some of them are conflicting, the writers of public finance have generally chosen and prescribed certain principles which a good tax system may adhere. In this connection, Adam Smith gave four principle of taxation which he called Canons of Taxation. Some other writers have also prescribed some other principles/canons.

Adam Smith’s canon of taxation:

1. Canon of Equality:
“The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is in proportion to the revenue which they respectively enjoy under the protection of the state.” This canon tries to observe the objective of economic justice.

2. Canon of Certainty:
This canon describes that “The tax which the individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor and to every other person,” the tax-payers should not be subject to arbitrariness and discretion of the tax officials, in which case there will be a scope for a corrupt tax administration.

3. Canon of Convenience:

This canon takes into consideration the interest of the taxpayer the view of payment of tax. It emphasizes that the mode and timings of tax payment should be, so far as possible, convenient to the tax-payer. This canon recommends that unnecessary trouble to the tax-payer should be avoided; otherwise various ill-effects may result.

4. Canon of Economy:
Every tax has a cost of collection. It is important that the cost of collection should be as minimum as possible. It will be useless to impose taxes which are too widespread and difficult to administer. Productivity of taxes has been given important in this canon.

An analysis of these canons indicates that Adam Smith was basically concerned with the ways in which economy could increase its productive capacity, and thereby achieve a higher rate of economis growth and at the same time he considered the convenience of the tax payer and economy in tax collection.

However, in view of the wide spread recognition of many other objectives of the economic philosophy of the Govt. and modern state, some additional principles have also been suggested by some other authors. Now a brief description about them follows:

5. Canon of Productivity:
It is also called the canon of fiscal adequacy. According to this principle, the tax system should be able to yield enough revenue for the treasury and the Government should not be forced to resort to deficit financing. The canon is thus also called canon of adequacy.

6. Canon of Diversity:
In line with canon of productivity, canon of diversity also gives importance to adequate collection of tax through diversification. Thus it stresses to the fact that it will not be a happy situation if the state depends upon few revenue inequitable as between different sections of the society. On the other hand, if the tax revenue comes from diversified sources, then any reduction in tax revenue on account of any one is likely to be very small on total tax revenue. However, too much multiplicity of taxes is also to be avoided. That leads to unnecessary cost of collection and violates the canon of economy.

7. Canon of Simplicity:

The tax system should not be too complicated. That makes it difficult to administer and understand and breeds problems of difference in interpretation and legal disputes.


8. Canon of Flexibility:
It should be flexible so that it becomes possible for the authorities without undue delay, to revise the tax structure, both with respect to its coverage and rates, to suit the changing requirements of the economy and of the treasury.

9. Canon of Social Objectives:
In this canon control and achieving social goal is emphasized. According to this canon, charging and collecting taxes always need to be in line with social and economic policy of the Government.

10. Canon of Functional Efficiency:
Tax policy needs to be efficient, operative and objective. According to Prof. Dew, the tax laws and regulations must be such as easily understandable to the assesse, easily administraitable and administration needs to be objective in implementation and it should adhere to economy.


Keywords: Canon of Taxation,Adam Smiths canon,Basic Principles of Taxation,diversity,simplicity,flexibility,productivity,economy,Justice Holmes,Taylor.

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