Cannons of Taxations

Canons of Taxation

These refer to the administrative aspects of a tax. The concern here is pertaining to the rate, amount, method of levy and collection of a tax.

In other words, the characteristics or qualities which a good tax should possess are described as canons of taxation. It must be noted that canons refer to the qualities of an isolated tax and not to the tax system as a whole. A good tax system should have a proper combination of all kinds of taxes having different canons.

As per Adam Smith, there are four canons 

Canon of Equality:

Taxation must ensure justice. The canon of equality or equity implies that the burden of taxation must be distributed equally or equitably in relation to the ability of the tax payers.

Equity or social justice demands that the rich people should bear a heavier burden of tax and the poor a lesser burden. That is,  a progressive tax system.

Canon of Certainty:

The time of payment, the manner of payment, the amount to be paid ought to be clear and plain to the contributor and to every other person. Also the government authorities should be clear of the revenue estimates from such taxation.

Canon of Economy:

This principle suggests that the cost of collecting a tax should not be exorbitant but be the minimum. Extravagant tax collection machinery is not justified. What is the rationale if a major chunk of what we collect is lost in collecting itself?

Canon of Convenience:

Tax should be collected in a convenient manner from the tax payers. It is convenient to pay a tax when it is deducted at source from the salaried classes at the time of paying salaries.

As per Economist Bastable, there are few more....

Canon of Elasticity:

Taxation should be elastic in nature in the sense that more revenue is automatically fetched when income of the people rises. This means that taxation must have built-in flexibility. More commonly referred to as the tax buoyancy.

Canon of Productivity:

This implies that a tax must yield sufficient revenue and not adversely affect production in the economy.

Canon of Simplicity:

This norm suggests that tax rates and tax systems ought to be simple and comprehensible and not to be complex and beyond the understanding of the layman. And hence the need for Direct Tax Code (DTC) and GST.

Canon of Diversity:

Canon of diversity implies that there should be a multiple tax system of diverse nature rather than having a single tax system. More or less similar to the canon of equality.

Canon of Expediency:

This suggests that a tax should be determined on the ground of its economic, social and political expediency. Like the idea of taxing the agricultural income in India would not be so right in all these senses.