Tax is the major source of Government revenue. In the medieval times, no proper attention was given to the tax by the economists. They believed that the Government should collect minimum revenue from tax. As tax affects every section of the society in one way or the other, it should be levied very carefully with a view to avoid unnecessary hardships to those who have no capacity to pay. The Government should follow the canons of taxation propounded by various economists for efficient economic administration.
Among 9 canons of taxation discussed, Adam Smith propounded the following first four canons of taxation –
(1) Canon of Equity. It implies that tax should be Levied on citizens on the basis of equality. The sacrifice of all citizens must be equal. In the words of Adam Smith “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 their revenue which they respectively enjoy under the protection of the State“. In other words, this canon of taxation maintains that every person should pay to the State as tax according to Liability to pay. It implies taxing the people on the rate of taxation.
(2) Canon of Certainty: This canon of taxation suggests that the tax which an individual has to pay, should be certain and not arbitrary. It should be certain to the lax payer how much tax he has to pay, to whom and by what time the tax is to be paid. The place and other procedural information should also be clear. It would protect the tax payer from the exploitation of tax authorities in any way. It will enable the tax payer to manage his income and expenditure. The Government will also be benefited by this principle.
(3) Canon of Convenience or Ease: According to this canon of taxation, every tax should be levied in such a manner and at such a time that it affords to the maximum of convenience to the tax payer. According to Adam Smith, a good taxation policy must be convenient for the tax payer. The reason is that the tax payer for goes his purchasing power and makes a sacrifice at the time of payment of tax hence the Government should see that the tax payer suffers no inconvenience.
For example, in an agricultural country, tax should be collected only after the harvesting has been done.
(4) Canon of Economy. This principle suggests that the cost of collecting tax should be the minimum so that a major part of collections may bring to the Government treasury. If the administration expenses in the collection of taxes consume a major portion of tax revenue collected; it cannot be said to be a good tax system.
In the words of 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”
Besides the above four canons of taxation suggested by Adam Smith, some other economists have also propounded certain other canons of taxation. The important among them are-
(5) Canon of Productivity. The theory was expounded by Prof. Bastable. According to this canon of taxation, the tax should be of such a nature as to yield sufficient income to the Government to run the administration efficiently and to work for the welfare of the people. Tax yield is important and every finance minister considers the yield before proposing any new tax. If a tax yields poor income, it cannot be said to be a good and productive tax. It is very often suggested that a few productive taxes are better than to go for a large number of unproductive taxes on the people.
(6) Canon or Elasticity. The tax system of the Government should be elastic so that tax burden may be increased or reduced from time to time as and when tile demand for revenue changes. The tax system should have a capacity to respond quickly to the changes in demand for revenue. If the tax system is inelastic, the Government cannot be able to meet various exigencies arise from time to time.
7) Canon of Simplicity. According to this canon of taxation, the tax should not be complicated in its nature. It should be so simple that tax payer can understand its complications without the help of any expert. It would safeguard the tax payer against the exploitation of tax authorities and experts It would also reduce the chance of tax evasion. If the tax is complicated, it will harass the tax payer and instigate him to evade tax. It would also add to legal complications.
(8) Canon of Diversity. The cannon requires that there should be a number of taxes of different varieties so that every class of citizen may be called upon to pay something towards the national exchequer. The yield from a number of taxes is more dependable than from anyone. The reason being that a person can manipulate to avoid single tax. But, if the Government imposes a variety of taxes on Persons and commodities, it will be difficult for a people to evade them. Similarly, the tax burden of different types of tax should not centralize on one class of persons. Every person must be Obliged to pay, directly or indirectly, something to the national exchequer.
(9) Canon of Desirability or Expediency. A tax should be expedient or desirable so that the Government may defend itself against the public criticism, by advocating its expediency. A tax without any expedient cause will face severe criticism from the tax payers. An unjust tax will always face sharp unwillingness on the part of the tax payers to pay and they will try to evade them, Every new tax must have a justification to create a feeling of acceptance in the mind of the tax-payers. The- above cannons of taxation should be taken into consideration by the Government while considering the levy of. fax. But. the tax system in the world satisfies all the cannons discussed above. It is also not possible to devise a tax system that may satisfy all the cannons of taxation in an adequate measure. The Government should see that its taxation policy satisfies most of the canons of taxation.