Cannons of Taxation

Tax, a mere three letter word is capable and does bring about tension on faces of people. We come across quite a lot of people who prefer not to understand the term for the simple point that it is complicated. So it is necessary that we know what tax is, before getting into other things.

In simple words or to say in a lay man’s language,  tax is nothing but the payment made by a person (individual, firm, company, trust, etc.) to a regulatory authority, i.e. the government. It could be either the central government or the state government. Tax is divided into two types – direct tax and indirect tax.
Direct tax is the tax which is paid directly to the government.
e.g. Municipal tax, Income tax, etc.
Indirect tax is also tax paid, not directly, but indirectly.
e.g. Suppose a person purchases a pen worth five rupees, a small amount of it, say twenty paisa would constitute indirect tax which he pays along with the price of the pen. Now the retailer pays a part to the wholesaler, who in turn pays it to the manufacturer who in turn pays it to the government. The point here is that the tax is paid. But unlike direct tax, it is paid indirectly.

The Income Tax Act is not just framed to squeeze out money from people, which is unfortunately the common notion among many people, even today. It is formulated on certain principles based on which tax is levied. These principles are known as Cannons of Taxation.
The Cannons of Taxation was first introduced by Adam Smith in the 18TH century in his famous work, Wealth of Nations. According to him, there are four cannons viz. equality, certainty, convenience and economy. But with the passage of time, the cannons increased which now includes elasticity, flexibility, simplicity and diversity.

CANNON OF EQUALITY

The cannon of Equality is based on the principle that all subjects are equal in the state. Hence it is necessary that all subjects support the government in their endeavours equitably. Equality means equity i.e. the proportion of their ability to pay as also income they earn. So it goes without saying that higher the income would attract more tax and also higher income would be taxed at a progressive rate. In simple words, equal people should be treated equally and unequal people, unequally.
e.g. For the Assessment Year 2010-2011, rates of Income Tax taxable on Taxable Income is as follows
Income below 1.6 lac – NIL
Income between 1.6 lac to 3 lac – 10%
Income between 3 lac to 5 lac – 20%
Income above 5 lac – 30%
Now a question may arise as to whether the slab rates mentioned above forms equality? Yes, they certainly do. It certainly is an obligation on the part of the rich to pay for the welfare of the other sections too. So the basis of taxation is to share, and share equitably.
Even in case of a woman assessee  and a senior citizen, the concept of equit comes into play. The basic exemption limit for woman assessee is 1.9 lac and a senior citizen, 2.4 lac.

CANNON OF CERTAINTY

This cannon talks about tax being certain and not arbitrary. The time, quantum and manner of payment should be clear and certain. Smith: “The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of the 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. Where it is otherwise, every person subject to tax is put more or less, in the power of tax-gatherer, who can either aggravate the tax upon any obnoxious contributor, or extort, by terror of each aggravation, some present or perquisite himself.” Certainty is needed not only from the point of view of the tax payer but also from that of state.
Income tax amendments are proposed on the budget day (28th Feb) so that when the Previous Year as per the I.T. Act begins, there is clarity and certainty in the minds of the people as to the I.T. propositions applicable for the P.Y.

CANNON OF CONVENIENCE

The Cannon of Convenience is based on the principle of being readily and easily assessed, collected and administered.
Assessment includes computation of tax and submission of Returns to the Regulatory Authorities. Income Tax is computed on Taxable  Income earned in the Previous Year and is paid in the Assessment Year. In cases where the tax liability is greater than Rs.5,000 it is payable in three instalments i.e. on or before 15th September, 15th December and 15th March in the Previous Year. The administration is through the Income Tax Department which also looks after the process of assessment. If due to any reasons out of the assessee’s control, if he is unable to pay tax or does not pay tax, an interest/penalty will be payable.

CANNON O ECONOMY

This cannon means that the tax ought to be contrived as to take from the people as little as possible and bring most of it to the treasury for the purpose for which it is meant. It is in some one or the other ways that taxes are frequently so much more burdensome to the people than they are beneficial to the sovereign. IT is in some one or other of these four different ways that taxes are frequently so much more burdensome to the people than they are beneficial to the sovereign.
e.g. A popular opinion is that, though the state collects a significant amount from the vehicle owners as road tax, the purpose does not seem to be met as the roads don’t seem to get any better.

We now see a few cannons which have come of late based on passage.

CANNON OF ELASTICITY

This in simple means the tax system should be elastic and flexible and not rigid. Same amount of tax irrespective of income is a rigid tax which would bot be favoured by the people. The rates of tax which can be increased or decreased through the union finance budget every year is an example of elasticity.

CANNON OF FLEXIBILTY

The cannon of flexibility is built from the point of view of the government. The flexibility is in a manner that rates, rules etc. can be changed every year through the finance budget. The tax is collected on the requirement of the government. It may increase for a few assessees and not for all.

CANNON OF SIMPLICITY

This cannon talks of tax being simple. The famous KIS model, meaning keep it simple. There should be a mix of both direct and indirect tax.
e.g. The rates of income tax payable by a corporate assessee is 30% on taxable income plus surcharge plus educational cess @3% on the sum. In simple words it is very simple!
The moment the tax system gets complicated the door of corruption and tax evasion tends to open.

CANNON OF DIVERSITY

The taxation system should be well diversified to include both direct and indirect taxes. They should be approached in a variety of ways. At the same time it should include a large number of taxes which are economical. It should be seen that the people who can afford to pay should be made to do so as it is for a cause.
e.g. A cess on purchase of petrol for the cause of tsunami.

To conclude it is always seen and felt that the people at large dislike the very fact of being taxed through tax. Under such a circumstance an indirect tax is very much suitable as people feel the pinch very less. But then, indirect taxes, many a times may not serve a few cannons. A direct tax then is disliked by many though it serves many a cannons of taxation. A blend of both – direct and indirect taxes in such a way that the tax payer pays it happily and the state deploys it to the best advantage.

This happened to be the matter for my first ever seminar, all thanks to Mr. Sridhar Kamath for the wonderful opportunity.