Tax and its principle

Canon of taxation

A good taxation system must achieve some major objectives from the justification ground, which is able to turn the taxation system more equitable for the public and at the same time decrease inequality from the society. This principle must be fit for social welfare context also. To achieve this criteria the great economist Adam Smith suggested four important set of principle. This is popularly known as Canon of taxation.Some other economist also suggested some more canon of taxation.

The major four canon of taxation which is prescribed by Adam Smith are

1) Canon of equality- taxation is not a process of collection of tax only rather it has some major objectives also. To erase inequality from the society it may takes an important steps. In realistic situation we face income is subject to diminishing marginal utility .That means if income increases the utility derived from the additional unit is decreases. In that case if same percentage of tax is applicable to all it will be burden some effect more on poor than on rich. So for the justification ground richer should pay more tax than the poor. i.e. the tax should be progressive in nature.

2) Canon of certainty-The tax which individual pay as a compulsory levy must be certain not random. He has full knowledge of the mode of payment, quantity and time he pay.i.e. All the tax related criteria in front of the tax payer should be clear .That means transparency and certainty of tax payment is necessary for a country taxation system.

3) Canon of convenience-The canon of convenience is nothing but the extension of canon of certainty. It means when individual pay tax he should know all the tax related things.i.e mode, timing and quantity to be paid. If he is not aware about all this things various ill effects may arise.

4) Canon of economy-It means the cost of collection of tax must be minimum possible. So that maximum amount of yield would be used for welfare purpose. Moreover there should not be any leakage in the collection of tax procedure.

The other canons of taxes are….

1)Canon of productivity-The tax system may be productive in two way firstly, from the view point of financial theory tax system may be collect enough money through taxation that could help the government to spent lots of money for social wellbeing. But from the justification ground the tax system not so much heavy that it would discourage the productivity. So the second view is the tax system may be that much burdensome that it would be encourage the producer to produce more.

2) Canon of elasticity and flexibility-Canon of elasticity means the tax system so much elastic that in any situation the government can easily increase or decrease the yield of tax through taxation system.

               On the other hand flexibility means the tax authority can revise the tax structure at any circumstance if the government feels the requirement of change is needed for current economic situation.

3) Canon of Diversity-Government should not depend on a few source of public revenue, because if any situation the tax rate is lower the yield of tax is decreases. So that diversified of taxation system is prescribed, i.e. any reduction in tax revenue should not able to affect the total tax. However, too much multiplicity of taxes is also to be avoided. 

4) Canon of co-ordination-Tax mainly levied by central government, state government, and local government. If among this tax authority there are no co-ordination then there may be causes unveil effect .so co-ordination among different authority is needed for a good tax structure.

5) Canon of Expediency-The tax should be based on some sound principle .So that the tax payers fully rely on the tax authority and there is no justification needed from the side of government.

6)Canon of simplicity- The last but most important canon of tax is simplicity of taxation system .i.e. the tax payer could easily understood  the nature ,the aim, time of payment and basis of estimation of tax. If the tax system is transparent and simple the tax payer should have no doubt about it.

So these are the major fundamental canon of taxation. The government should have take consideration this canon of taxation when he imposed the levy of tax on the public.