Historical development of taxing system in India

A tax may be defined as a "pecuniary burden laid upon individuals or property owners to support the government, a
payment exacted by legislative authority. A tax "is not a voluntary payment or donation, but an enforced
contribution, exacted pursuant to legislative authority". Taxes consist of direct tax or indirect tax, and may be paid in
money or as its labour equivalent (often but not always unpaid labour). India has a well developed taxation structure.
The tax system in India is mainly a three tier system which is based between the Central, State Governments and the
local government organizations. In most cases, these local bodies include the local councils and the municipalities.
According to the Constitution of India, the government has the right to levy taxes on individuals and organizations.
However, the constitution states that no one has the right to levy or charge taxes except the authority of law.

Evaluations of tax system in India:

It is the basic object of Public Finance to maximize the welfare of the society, by ensuring rational allocation of
resources in conformity with the economy’s priorities. The development of a nation to a large extent depends upon
the mobilization of revenue and its spending. India is a federation. The salient characteristic of a federal government
is legislative autonomy and financial independence. This principle has enshrined in the constitution of India.
Historical background plays an important role in the financial settlements of governments. A close observation of
financial settlements in the past will help us to understand the present system.
The Regularity Act of 1773 and Character Act of 1833 were the beginning of financial settlements in unified India.
Thereafter, steps towards the separation of tax resources between the center and the provinces were taken on the
recommendations of Mr. Montague, the then Secretary of State for India in 1919.

As far as Income tax is concerned, there is enough evidence to show that taxes on income in some form or the other
were levied even in primitive and ancient communities. References to taxes in ancient India are found in Manusmriti
and Kautilyas Arthashastra. Manu the ancient sage and law giver stated that king should levy taxes according to
sastras. He advised that taxes should be related to income and should not be excessive. He laid down that traders and
artisans should pay 1/5th of their profits in gold and silver, while the agriculturists were to pay 1/6th, 1/8th and
1/10th of their produce depending upon their circumstances. The detailed analysis given by Manu on the subject
clearly shows the existence of a well planned taxation system, even in ancient times. Kautilyas Arthasastra was the
first authoritative text on public finance, administration and the fiscal laws. Collection of income tax was well
organized during Mauryan Empire. Schedule of tax payment, time of payment, manner and quantity were fixed
according to Arthasastra. It is remarkable that the present day system of taxation is in many ways similar to the
system of taxation given by Kautilya 2300 years ago.

In modern India it was introduced, for the first time in 1860 by British rulers following the mutiny of 1857. The period
between 1860 and 1886 was a period of experiments in the context of Income Tax. This period ended in 1886 when
first Income Tax Act came into existence. The pattern laid down in it for levying of Tax continues to operate even to-
day though in some changed form. In 1918, another Act- Income Tax Act, 1918 was passed but it was short lived and
was replaced by Income Tax Act, 1922 and it remained in existence and operation till 31st. March, 1961.

On the recommendation of Law Commission & Direct Taxes Enquiry Committee and in consultation with Law
Ministry a Bill was framed. This Bill was referred to a select committee and finally passed in Sept. 1961. This Act came
into force from 1st April 1962 in whole of the country. Income Tax Act, 1961 is a comprehensive Act and consists of
298 Sections. Sub-Sections running into thousands Schedules, Rules, Sub-Rules, etc. and is supported by other Acts
and Rules. This Act has been amended by several amending Acts since 1961. The Annual Finance Bills presented to
Parliament along with Budget make far-reaching amendments in this Act every year

Thus to improve the financial independence of both, center and state, the concept of distributing power to tax in the
both wings of federation, had been evolved and also adopted in the constitution of India.
Today India has a well-developed tax structure with clearly demarcated authority between Central and State
Governments and local bodies. Central Government levies taxes on income (except tax on agricultural income, which
the State Governments can levy), customs duties, central excise and service tax. Value Added Tax (VAT), stamp duty,
state excise, land revenue and profession tax are levied by the State Governments. Local bodies are empowered to
levy tax on properties, octroi and for utilities like water supply, drainage etc. Indian taxation system has undergone
tremendous reforms during the last decade. The tax rates have been rationalized and tax laws have been simplified
resulting in better compliance, ease of tax payment and better enforcement. The process of rationalization of tax
administration is ongoing in India.

Reasons or needs for taxation.

In a context where many governments have to cope with less revenue, increasing expenditures and resulting fiscal
constraints, raising revenue remains the most important function of taxes, which serve as the primary means for
financing public goods such as maintenance of law and order and public infrastructure. Assuming a certain level of
revenue that needs to be raised, which depends on the broader economic and fiscal policies of the country
concerned, there is a need of number of broad tax policy considerations that have traditionally guided the
development of taxation systems.
There are five basic objects for which taxation is required such as:
1. Funding Government for provision of public goods and services: The most basic motivation for taxation is to
raise funds to support public spending, either for public goods (i.e. goods that otherwise would not be
supplied by the market) or merit goods (i.e. goods that society believes should be provided for someone's
benefit irrespective of whether or not the market 'could' provide such a good).
2. Equity and redistribution :Equity objectives can range from providing a 'safety net' to support those on low
incomes , providing temporary assistance in the event of an unforeseen event, through to more fundamental
and comprehensive redistribution of resources (perhaps to counteract an imbalance in income/wealth created
by other means). The linkages between the taxation and welfare systems are of crucial importance in these
respects.
3. Macroeconomic framework
A stable but flexible fiscal framework is essential to delivering macroeconomic stability. Tax plays an important
role, particularly as alongside the welfare system, it acts as an 'automatic stabiliser' on the economy.
4. Behavioural Change (Corrective activity and sustainability)
Taxes can also be imposed with the aim of influencing behaviour, either if it is efficient to do so (e.g. in the
presence of a market failure such as an externality) or if it is socially desirable to do so (e.g. discourage
consumption of tobacco).
5. Growth, competitiveness and industrial policy
Finally, the tax system can also be used to support wider growth and competitiveness objectives. For example,
it can be used to support industrial policy through targeting relative support for particular sectors or activities
(for instance R&D). In addition, given that all countries have to raise some form of taxation, how a tax system
is designed - and how efficient it is - can be an advantage against key competitors.

These objects can be attained through applying basics principles (Simplicity, Neutrality, Stability and Flexibility) on the
method of the taxation (Income, Wealth, and Consumption). These are all linked, applying the principles to the
different methods of taxation (and structures of taxation) should allow any country to meet the objectives of taxation
in the most effective and efficient manner. It can also be expressed through following framework:
Constitutional aspects of Indian taxes
The Constitution of India, 1950, had clearly demarcated the financial avenues between the center and states. Articles
268 to 300 of the Constitution of India, deal with financial matters. Article 246 of the Constitution, lays down that
Parliament has exclusive power to make laws with respect to any matter enumerated in Union List (List I of schedule
VII), the states legislature have complete power to make laws with respect to any matter enumerated in the State List
(List II of schedule VII) and both Parliament and State Legislature have power to make laws with respect to any
matter enumerated in the Concurrent List (List III of schedule VII).

The constitution of India under Article 265 clearly states that no taxes shall be levied or collected except by the
authority of law. Entries 82 to 92B of List I of the VII Schedule describe the taxation powers of the Union Government.
Entries 45 to 63 of List II of the VII Schedule specify the taxation powers of the state governments. List III does not
contain any head of taxation which means the Union and the states have no concurrent powers of taxation. This
provision has been made in the constitution so as to avoid duplication in tax administration, and to minimize tax
rivalry between the Union and States and among the States.
Local governments do not have a provision of taxing powers on subjects. However, Article 276 implies that, taxes on
professions, trades, callings or employment, are for the benefits of a state, or of a municipality, district board or any
other local authority. Besides this, the states may assign any of the taxes to the local governments from the state list.
Generally, local governments are provided with property taxes, Octoi and taxes on vehicles.
There are constitutional guarantees to avoid overlapping of tax powers between the union and states. The propriety
of the Centre is exempted from state taxation under Article 285(1). Similarly, the propriety of the states is exempted
from union taxes (Article 289(1)). As far as union territories are concerned, the union government has the power to
impose any tax from the state list.

The taxing powers of the union and state are clearly demarcated by the Constitution of India. Taxes which are within
the Jurisdiction of the of union are enumerated in List I of the seventh schedule and taxes which are within the
jurisdiction of the states are enumerated in List II of the Seventh Schedule of the Constitution of India.

S.No. Parliament of India

1 Taxes on income other than agricultural income (List I, Entry 82)
2 Duties of customs including export duties (List I, Entry 83)
3 Duties of excise on tobacco and other goods manufactured or produced in India except (i) alcoholic
liquor for human consumption, and (ii) opium , Indian hemp and other narcotic drugs and narcotics,
but including medicinal and toilet preparations containing alcohol or any substance included in (ii).
(List I, Entry 84)
4 Corporation Tax (List I, Entry 85)
5 Taxes on capital value of assets, exclusive of agricultural land, of individuals and companies, taxes on
 capital of companies (List I, Entry 86)
6 Estate duty in respect of property other than agricultural land (List I, Entry 87)
7 Duties in respect of succession to property other than agricultural land (List I, Entry 88)
8 Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freight
(List I, Entry89)
9 Taxes other than stamp duties on transactions in stock exchanges and futures markets
10 Taxes on the sale or purchase of newspapers and on advertisements published therein
11 Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in
the course of inter-State trade or commerce
12 Taxes on the consignment of goods in the course of inter-State trade or commerce
13 All residuary types of taxes not listed in any of the three lists of Seventh Schedule of Indian
Constitution

S.No. State Legislature

1 Land revenue, including the assessment and collection of revenue, the maintenance of land records,
survey for revenue purposes and records of rights, and alienation of revenues (List II, Entry 45)
2 Taxes on agricultural income (List II, Entry 46)
3 Duties in respect of succession to agricultural income (List II, Entry 47)
4 Estate Duty in respect of agricultural income (List II, Entry 48)
5 Taxes on lands and buildings (List II, Entry 49)
6 Taxes on mineral rights (List II, Entry50)
7 Duties of excise for following goods manufactured or produced within the State
(i) alcoholic liquors for human consumption, and
(ii) opium, Indian hemp and other narcotic drugs and narcotics (List II, Entry 51)
8 Taxes on entry of goods into a local area for consumption, use or sale therein (see Value added tax )
(List II, Entry 52)
9 Taxes on the consumption or sale of electricity (List II, Entry 53)
10 Taxes on the sale or purchase of goods other than newspapers (List II, Entry 54)
11 Taxes on advertisements other than advertisements published in newspapers and advertisements
broadcast by radio or television (List II, Entry 55)
12 Taxes on goods and passengers carried by roads or on inland waterways (List II, Entry 56)
13 Taxes on vehicles suitable for use on roads (List II, Entry 57)
14 Taxes on animals and boats (List II, Entry 58)
15 Tolls (List II, Entry 59)
16 Taxes on profession, trades, callings and employments (List II, Entry 60)
17 Capitation taxes (List II, Entry 61)
18 Taxes on luxuries, including tax on entertainment, amusements, betting and gambling (List II, Entry 62)
19 Stamp duty (List II, Entry 63) Any tax levied by the government which is not backed by law or is beyond
the powers of the legislating authority may be struck down as unconstitutional.
Though, the taxation powers allocated to the Union and the states as per Constitution of India are mutually exclusive,
all the taxes assigned for the Union are meant for the purpose of Union. As the state governments are undertaking
most of the expansive and expensive developmental activities, the revenue needs of the states are growing by leaps
and bounds. To supplement the revenues of the states in accordance with their needs, specific provisions were made
to set apart a portion of central revenues for the benefit of states.
Since, generally it is presumed that the distribution of tax powers is biased towards the Union government thus to
meet the resulting revenue imbalance between the Union and the states, four dynamic balancing devices have been
adopted.
a) Revenue sharing b) Revenue Distribution c) Revenue Assignment and d) Grants-in-aid
In respect of revenue sharing, the state’s share the proceeds of the taxes on income (other than corporate tax) and of
Union excise duties.

Regarding revenue distribution, the entire proceeds of some of the taxes in the Union List are distributed among the
states. These taxes include succession and estate duties, terminal taxes on passengers and goods carried by railway,
sea or air, taxes on railway fares and freights, taxes on the sale and purchase of newspapers, sale and purchase tax
on inter-state trade and additional duties of excise in lieu of sales taxes.

The revenue assignment relates to the taxes in the Union List whose revenue has been assigned to the state
governments. These taxes are levied by the Union but the proceeds are collected and retained by the states for their
use. Such taxes are stamp duties and excise duties on medicine and toilet preparations containing alcohol.
Finally, the Constitution provides for a system of grants which may be conditional or in aid of general revenue. Thus,
all these taken together along with the financial powers under the state List, form the total financial resources of the
state governments. Therefore the main sources of revenue of the states are:
a) Tax Revenue b) Non-Tax Revenue
c) Revenue sharing d) Grants-in-aid

The salient features of the true federal system warrants legislative and financial autonomy. But in practice, most of
the elastic and higher revenue taxes are vested with the Union and the states are left with majority of the
developmental activities and fewer elastic taxes in its armory. As a result states are endowed with legislative
autonomy and financial dependence. This is the prime characteristics of Indian federation. This feature, over a
period of time developed due to the miss-matching of revenue and expenditure and as time passes this becomes the
source of confrontation between the Union and state governments. Under these circumstances, the sales tax
assumes an important place in the fiscal armory of the states, particularly as an instrument of a much sought fiscal
autonomy.

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The Characteristics features of good taxing system

To analysis the merits of a tax system, it must be looked at as a whole. For, a tax system to be a good one just cannot
have all good taxes but none bad at all. The state cannot raise sufficient revenue and, at the same time, please the tax
payers.

As a noted philosopher Edmund Burke once remarked, “It is difficult to tax and to please as it is to love and to be
wise.” In a tax system, therefore, different taxes, good and bad may be combined together which tend to correct and
balance one another’s effects.
Hence, it should be noted that a good tax system does not mean a perfect tax system which contains only the good
taxes based upon the canons of taxation, fetching adequate revenues and causing no hurt to the tax payer.
A good tax system is one which has predominantly good taxes and which fulfills most of the canons of taxation: it
must yield sufficient revenue, but cause minimum aggregate sacrifice to the people and minimum obstruction to
incentives for production.

A good tax system should possess the following characteristics:

1. It should ensure maximum social advantage. Taxation should be used to finance public services.
2. It should cause minimum aggregate sacrifice. In a good tax system, the allocation of taxes among tax payers is
made according to the ability to pay. It falls more heavily on the rich and less on the poor. It should be reasonably
progressive so as to minimize the gap of inequality of income and wealth in the community, thereby ensuring their
better distribution.
3. In a good tax system, taxes are universally applicable in the sense that persons with same ability to pay are treated
in the same way without any discrimination whatsoever. In the Indian tax system, however, this attribute is lacking to
some extent. For instance, income tax is not universal in India, as no income tax is levied on agricultural incomes.
4. It should contain a predominance of good taxes satisfying most of the canons of taxation. That is to say, the taxes
imposed should be more or less equitable, convenient to pay, economical, certain, productive, flexible and simple as
far as possible.
5. The entire structure of the tax system should have built-in flexibility, so that changes are possible according to the
changing conditions of a dynamic economy. It should be possible to add or withdraw a tax without destroying the
entire system and its balancing effect. A rigid tax structure is very unsatisfactory. Taxation must cope with the
changing needs of the modern government. The capacity to adjust itself to the dynamic conditions of an economy is a
virtue of a good tax system.
6. A good tax system should be a balanced one. It means there must not be one kind of taxes but all types in the right
proportion. In other words, it should not contain just progressive, regressive or proportional taxes only, but a healthy
combination of all such taxes. Similarly, it should have a balance of direct and indirect taxes.
7. The tax system should be multiple, but then took a great multiplicity is not desirable. Dalton, however, suggests
that a good tax system has to be also a reasonably efficient administrative system.
8. Further, in a good tax system there is simplicity, implying the absence of any unnecessary and avoidable
complexities.
9. A good tax system should not hamper the development of trade and industry, but instead help the rapid economic
development of the country. Taxation is designed to mobilize the surplus resources in the economy and not deprive
the private sector of its resources.
Above all, the most fundamental characteristic of a good tax system is the appreciation of the rights and problems of
the tax payer. A good tax system must contain the majority of such taxes which produce good effects on production
and equitable distribution of national income and wealth. To achieve the socialistic goals of public policy a good tax
system plays a very important role.

Tax and it be differentiated from fee. Discuss with the help of appropriate legal provision and decided cases.

A tax (from the Latin tax; "rate") is a financial charge or other levy imposed upon a taxpayer (an individual or legal
entity) by a state or the functional equivalent of a state to fund various public expenditures. A failure to pay, or
evasion of or resistance to taxation, is usually punishable by law. Taxes are also imposed by many administrative
divisions. Taxes consist of direct or indirect taxes and may be paid in money or as its labor equivalent. Few countries
impose no taxation at all, such as the United Arab Emirates.

Taxes
A tax may be defined as a pecuniary burden laid down individual or property owner to support the government, a
payment exacted by legislative authority. “A tax is not a voluntary payment or donation, but an enforced contribution
imposed in pursuant to legislative authority”. A tax consists of direct tax or indirect tax and may be paid in money or
as its labor equivalent often but not always unpaid labour.
A tax represents money that a government or its authority charges from an individual or business when they perform
a particular action or complete a specific transaction. This tax is often assessed as a percentage of an amount of
money involved in the transaction. For example, a tax is applied on the income that a person makes during a year. In
addition, a tax is often placed on the sale of goods and services.

Fees
A fee is related to a tax but not the tax, a fee is a charge paid to the government, authorities or any other entity, by
individuals, business or other legal and artificial entities against services taken from. Thus a fee is paid specifically
against the consumption of a specified services or utilities. The fee rate is directly related with the cost of maintaining
the service plus profit margin (if any). Amount received as a fee is generally not used for the purposes other than,
providing the service for which the fee is collected. For example, a government may charge a fee to visit a park and
the amount received is spent for maintenance of the park. Furthermore a fee may be collected by government or non
government (private) entities with respect to services and utility rendered, but tax can only be collected by
government or its agency under proper authority of the constitution of India.

Direct and Indirect Taxes, Are indirect taxes proved to be a penalty upon taxpayer?

Direct Taxes:
A Direct tax is a kind of charge, which is imposed on and collected directly from the persons (as defined under sec.
2(31) of Income tax act 1961) by the government or its agencies under proper authority of law. A direct tax is one that
cannot be shifted by the one person to other. Thus a direct tax is a tax that is both imposed and collected upon a specific
person or economic agent. Most income and wealth taxes are defined as direct taxes such as income tax, corporate tax,
inheritance tax, wealth tax etc. In India Direct tax are imposed on the basis of the residential status of the person
which may be
(i) Resident & Ordinarily Residents (Residents)
(ii) Resident but not Ordinarily Residents and
(iii) Non Resident
Once the residential status has been defined, total income of the Assessee has been ascertained in accordance with
sec. 5 of the income tax act 1961, which deals with the scope of total income. Once the total income has been
assessed net taxable income is calculated in accordance with the provision of the income tax act 1961, and then tax
liability of the Assessee is find out by applying appropriate tax rates, surcharges and cess.
Indirect Tax:
An indirect tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic
burden of the tax (such as the customer). An indirect tax is one that can be shifted by one taxpayer to someone else until the
final consumer of the good or services. An indirect tax is often collected by one particular economic agent (e.g. a firm)
but actually imposed on another. For example, indirect taxes include taxes such as VAT and other consumer taxes
(i.e. Sales Tax, Service Tax, Custom, and Excise etc.) which are collected by the seller but the purchaser of the good
pays the tax. Direct and indirect taxes can lead to different implications, both economic and administratively, and
therefore their distinction is important in considering the design and reform of a tax system.

Division of taxing power between the center and state

Any federal county cannot survive when single wing is economically empowered. So it is the basic need to empower
both i.e. state and center economically, it needs proper authority by the constitution. In India Article 246[3] of the
Indian Constitution, distributes legislative powers including power to tax, between the Parliament of India and the
State Legislature. Schedule VII enumerates these subject matters on which they can make the law and impose taxes:
List - I (Central List) entailing the areas on which only the parliament is competent to make laws,
List - II (State List) entailing the areas on which only the state legislature can make laws, and
List - III (Concurrent List) describe the areas on which both the Parliament and the State Legislature can make laws.
Separate heads of taxation are not given in the Concurrent List, thus Union and the States have no concurrent power
of taxation. The Union or central list gives thirteen heads of taxation and state list gives nineteen heads on which
taxes can be imposed and collected.

Levying of any tax is very complex and lengthy process, sometime it clash with the fundamental right along with other
constitutional provisions but still are in public interest, because there is a need to generate fund or revenue for the
welfare of the society. Thus there is a need to empower the government to tax.

Power to tax means constitutionally granted power to the government and its agencies, to impose and collect taxes
on the Income, wealth or expenditure of the persons living within its jurisdiction or territory. Some time it also
exercise extra territorial jurisdiction subject to the theory of territorial nexus (Art. 245(1).

Theory of Territorial Nexus:

The Legislature of a state may make law for the whole or any part of the state (Art 245(1). This means that the state
laws would be void if it has extra territorial operation (Kachini v/s State of Madras Air 1960 SC 1080). However, there
is one exception to this general rule. A state may make law having extra territorial operation, if there is sufficient
nexus or linking between the object and the state (Wallace V/s Income Tax Commissioner Bombay AIR 1945 SC 48;
State of Bombay V/s RMDC AIR 1957 SC 699; TISCO V/s State of Bihar AIR 1958 SC 452)

Delegation of taxing power

Delegation of the power of taxation made under the authority of an act of Parliament or tax shall be levied or
collected under authority of law. Generation of revenue through tax is very complex process. Deciding how tax laws
operate in a country and actually implementing them requires significant planning and coordination between
different branches of government. In doing so, the lines dividing government organs become somewhat blurred.
Often times, the legislature delegates some functions essential for day-to-day administration of state policy onto the
executive. There are many aspects of taxation policy, and each is likely to be differently interpreted by the Supreme
Court while deciding the validity of a delegated function.

Delegated Legislation in Tax Laws

The extent to which delegation in tax laws is permissible has changed over time. While the Supreme Court’s position
has always been that the power to tax is a legislative function and only matters that incidentally arise in the exercise
of that function can be delegated to the executive, its own interpretation of this position has broadened to allow
more Substantial functions to be exercised by the executive.

The Supreme Court stated in Rajnarain v. Chairman, Patna Administration that the power to tax is essentially a
legislative function. Quoting Article 265 of the Constitution of India, it was held that the constitutional mandate is on
the legislature for imposing taxes. Subsequently, the Court held that some elements of the power to tax might
devolve onto the executive after the legislature enacts a law. However, even in that case, it mentioned that broad
powers are not and cannot be delegated to the executive. In other words the power to delegate is for the purpose of
matters of details’ concerning the working of the tax law in question.
Despite advocating broad principles that seemingly suggested minimal executive powers, the Supreme Court’s
interpretation of the rule that essential legislative functions may not be delegated actually permitted substantial
intervention by the executive. More specifically, the power to exempt goods or persons, the power to bring additional
transactions, commodities or persons within the purview of a tax and the power to fix the rate of tax itself were held
to be delegable.
One of the earliest cases on the question of executive authority in taxation was Banarasi Das v. State of Madhya
Pradesh. In this case, the Supreme Court adjudicated on Section 6(2) of Berar Sales Tax Act, 1947. This provision
empowered the State government to amend a schedule to the Act that listed the goods on which service tax could be
levied. It was contended that this power of the state executive was excessive and was actually an essential legislative
function. Justice Venkatarama Aiyer held that the impugned provision was not an impermissible delegation of
legislative power. The Court relied on Raj Narain’s case and held that it is permissible for the executive to determine
the details relating to the operation of taxation laws, such as the selection of those on whom the tax is to be laid and
the rates at which such tax is to be charged.

Some years later, the Supreme Court once again took up the question in Devi Das v. State of Punjab. In this case, a
five judge bench adjudicated upon the validity of section 5 of the Punjab General Sales Tax (Amendment) Act,
1948.The impugned provision gave the Provincial Government the discretion to levy sales tax at the rate not
exceeding 2%. The Court held that it was permissible to confer a ‘reasonable area of discretion on the Government
by a fiscal statute, but a large statutory discretion by means of a wide gap between the maximum and minimum
rates and thus enabling the government to fix an arbitrary rate is not sustainable’.
Just two years earlier, another five judge bench had decided in Corp. of Calcutta v. Liberty Cinema that the power to
fix rates and tax a certain group was allowed to be delegated. To clarify the apparent inconsistency between Devi Das
and Liberty Cinema, the Supreme Court constituted a seven judge bench to hear Municipal Corporate of Delhi v.
Birla Spinning and Weaving Mills Ltd., in which it attempted to resolve the matter. In this case, the respondents
contested the validity of section 150(1) of the Delhi Municipal Corporate Act, 1957. The provision provided the
maximum rate of tax that could be levied, and allowed the Central Government to decide what the rate would be.
The provision was upheld by a majority of 5:2, wherein Wanchoo, CJ wrote in his judgment that such provisions are
perfectly valid as as essential legislative function was retained by the legislature in its own hands.

Wanchoo, CJ, quoted with approval the observation of Aiyer, J in Banarasi Das and pointed out that there is no
conflict between Devi Das and Liberty Cinema. Most importantly, he declared that when the constitutionality of a
delegation is considered, it has to be seen in light of the ‘guideline theory’, which posits that a delegation is
permissible, if it is made with sufficient guidelines and policy for the exercise of the power conferred.
Having settled the position, few cases exist that significantly alter the position taken by the Court in Birla Spinning
and Weaving. One such case is S.B. Dayal v. State of U.P. wherein the validity of section 3 D (1) of the U.P. Sales Tax
Act, 1948, was challenged. This provision gave the government the power to tax goods at up to 5 percent. While
rejecting such a contention, the Court held that ‘19th Century doctrines of delegation of power were out of date and
there is a need for extensive delegation of legislative power under a cabinet form of government even if that
legislative power is a power to fix the rate if tax’. The Supreme Court speaking through Justice Hegde commented
that:-
“However much one might deplore the new despotism of the executive, the very complexity of modern society and
the demand that it makes on its government have set in motion forces which have made it absolutely necessary for
the legislatures to entrust more and more power to the executive”
Justice Khanna reaffirmed the guideline theory that was accepted in Birla Spinning and Weaving. Justice Mathew
gave an alternate reasoning, while concurring with the majority, and held that it was not for the Court to ‘hunt for
legislative policy or guidance in the crevices of the Statute’.
Exemptions

Having given a broad overview of the growth and expansion of the delegation principle in tax law,The government’s
power to exempt the payment of taxes can either be through ad hoc exemptions on case to case bases, or by framing
rules that govern when and to whom exceptions are made. Both these powers can possibly be delegated to the
executive. Despite the content of the power being similar, the status of validity of such powers is different.
In the second and more general delegation of the power to make rules allowing for exemptions, the Supreme Court
has held in Union of India v. Jalyan that the power to grant exemptions through rule making can best be described as
conditional legislation. However, it is held that since the Parliament ‘cannot constantly monitor the needs of the
economy, it is essential to empower the Central Government to exercise certain functions’. In the exercise of such
functions, the Central Government may make rules that exempt some goods or persons from the tax net. While it
may be some form of legislation, it is a necessary and legal delegation. This is in consonance with other decisions of
the Court such as Dwarka Prasad v. State of Madhya Pradesh and Irani v. State of Madras, wherein the Court held
that ‘whenever the legislature lays down the policy of law, it may authorize the executive to make subordinate
rules. This would not amount to anything more than ‘filling up the details’.

Conclusion: It is clear that there is a need for the legislature to delegate some tasks to its executive. The existence of
this need in the case of tax laws is even clearer. What is not so clear, however, is how far this need translates into
legally valid actions. The jurisprudence on this point has expanded and today, we see that the Supreme Court upholds
a majority of tax legislations that confer powers on the executive. It might even be said that this attitude displays a
sort of special treatment to tax laws. Unlike in other spheres where the law operates, the Supreme Court seems to be
mindful of the fact that taxation imposes a heavy burden on the State; one that cannot be managed without deep
cooperation between the organs of government. Such cooperation sometime involves extensive support by the
executive, to encourage and facilitate this necessary cooperation; the Supreme Court has taken a lenient view on
delegation of legislative functions to the executive. The result has been an ever-increasing occupation of power by the
executive. The only concern that remains unaddressed so far is whether such extensive delegation will at some time
lead to an over powerful executive. Only time and further case law will give us the answer to this question.

Discussion about inter-state taxation

The taxation of inter-state trade in the form of CST is inconsistent with the principle of VAT. It is an economically
irrational and harmful tax as:(a) it acts as a barrier to trade;(b) it leads to cascading and escalation of costs;(c) being
based on the origin principle it leads to tax exportation from one state to the other states;(d) It leads to economic
distortions such as vertical integration.

Evolution of Tax on Inter-State Sales

Historically, the 1950 Constitution empowered states to levy "taxes on the sale or purchase of goods other than
newspapers". It did not provide for the levy of tax on inter-state sales and placed the regulation of inter-state trade
and commerce in the hands of the Union government. Article 286, as originally provided, read as follows:
"(1) No law of a state shall impose, or authorize the imposition of, a tax on the sale or purchase of goods where such
sale or purchase takes place - (a) outside the state; or(b) in the course of the import of the goods into, or export of
the goods out of, the territory of India.

Explanation: For the purpose of sub-clause (a), a sale or purchase shall be deemed to have taken place in the state in
which the goods have actually been delivered as a direct result of such sale or purchase for the purpose of
consumption in that state, notwithstanding the fact that under the general law relating to the sale of goods the
property in the goods has by reason of such sale or purchase passed in another state.

Except in so far as Parliament may by law otherwise provide, no law of a state shall impose, or otherwise authorize
the imposition of, a tax on the sale or purchase of any goods where such sale or purchase takes place in the course of
inter-state trade or commerce. Provided that the President may by order direct that any tax on the sale or purchase
of goods which was being lawfully levied by the government of any state immediately before the commencement of
this Constitution shall, notwithstanding that the imposition of such tax is contrary to the provisions of this clause,
continue to be levied until the 31st day of March, 1951.

No law made by the Legislature of a state imposing, or authorizing the imposition of, a tax on the sale or purchase of
any such goods as have been declared by Parliament by law to be essential for the life of the community shall have
effect unless it has been reserved for the consideration of the President and has received his assent". The meaning
and the import of the above article was not in itself absolutely clear. The Explanation attached to Article 286(1) as
well as clause (2) came for decision by the Supreme Court in State of Bombay\/s. United Motors On March 30, 1953
the court held that the Explanation provided that the state in which the goods sold or purchased and actually
delivered for consumption therein is the state in which the sale or purchase is to be considered to have taken place
notwithstanding the fact that the property in such goods passed in another state. According to the Explanation, if the
goods are actually delivered in the taxing state, as a direct result of a sale or purchase, for the purpose of
consumption therein, then such sale or purchase shall be deemed to have taken place inside the state and outside all
other states. The latter are prohibited from taxing such sale or purchase; the former alone is left free to do so.

The above judicial interpretation of the Explanation attached to Article 286 led to certain difficulties for trade and to
the assessment and collection of tax from non-resident dealers.

The taxing authorities of the State in which the goods were delivered for consumption started calling upon the non-
resident dealers to file returns, produce accounts, get them registered and comply with the demands of tax.
Dealers in Calcutta, for example, were summoned to produce their accounts before the taxing authorities in different
states and be subject to the provisions of the sales tax laws of Maharashtra, Tamil Nadu, Kerala and other states.

In view of the problems faced by the dealers in different states and the uncertainty about which state should tax a
given transaction, the matter was referred to the Taxation Enquiry Commission (TEC). The TEC (1953-54) in this
context pointed out that the Constitution, as originally framed, and implied that the sales tax should be levied by the
consuming state. The sales tax in its view was a destination-based tax on consumption to be levied by the state
where consumption takes place. The TEC, however, differed from this view and expressed the opinion that the
exporting state could claim a small share of the tax. Which should be determined by the Union government?
Hence, the Suggested amendment of the Constitution to enable the Union government to impose sales tax on inter-
state trade. It recommended that the proposed central legislation should specify the (maximum) rate at which tax
on inter-state sale should be levied. The intention of the 'TEC in permitting the levy or sales tax on inter-state trade
was to ensure that some revenue accrues to the exporting states. At the same time it should not unduly burden on
the importing state.

The TEC had expressed the view that while the exporting state could claim a small share of tax on the commodity
exported to another state, the tax space should be occupied by the state where consumption takes place. The TEC.
therefore, suggested a maximum rate of one percent on inter-state sales In addition, it prescribed specific conditions
for the levy of tax on goods of special importance in inter-state trade (namely one stage taxation by exporting state
and no further taxation on it by importing state) and recommended a maximum percent tax on all such goods.
On September 6, 1955 the Supreme Court in a majority decision in Bengal Immunity Co. Ltd. Vs the State of Bihar
Over-ruled its earlier decision in the United Motors case.

According to the majority opinion (it was held that) “Until Parliament by law made in exercise of the powers vested
in it by clause (2) provides otherwise, no State can impose or authorize the imposition of any tax on sales or
purchases of goods when such sales or purchases take place in the course of inter-state trade or commerce.” This
decision had the effect of invalidating assessments made by sales tax authorities in respect of sales that took place in
the course of inter-state trade, following the earlier decision in the United Motors case, requiring refund of taxes so
collected.

To get over the effect of this decision and with a view to bringing about economic stability in the states, the President
promulgated on January 30, 1956, the Sales Tax Laws Validation Ordinance 1956. The effect of the Ordinance was to
legalize the taxes collected by the various states during the period April 1, 1951 to September 6, 1955. The validity of
the Ordinance and the Validation Act was challenged and eventually the Supreme Court gave an authoritative
interpretation. The net resultant position was that while intra-state sales could all along be taxed under the relevant
state law, inter-state sales made only up to 6th September, 1955 could be so taxed by the state of delivery- cum-
consumption. Inter-state sales made after that date could neither be taxed by the state of dispatch nor by the state of
delivery, "till Parliament may by law otherwise provide”
In this context, keeping in view the recommendations of TEC for certain modifications in the provisions of the
Constitution, the Constitution (Sixth Amendment) Act, 1956 was enacted. As a result:
i. A new entry, No. 92A, was inserted in the Union List, bestowing upon the Union the powers to levy
"taxes on sale or purchase of goods other than newspapers where such sale or purchase takes place in
the course of inter-state trade and commerce".
ii. Entry 54 in the state list was modified and the states’ power was confined to levy "taxes on the sale or
purchase of goods other than Newspapers subject to the provisions of entry 92A of List I."
iii. A new Sub-Clause (g) was inserted in clause (1) of Article 269 empowering the Government of India to
levy and collect (to be assigned to the states in accordance with clause (2) of the Article) "taxes on the
sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course
of inter-state trade or commerce".
iv. A new clause (3) was inserted in Article 269 whereby "Parliament may by law formulate principles for
determining when a sale or purchase of goods takes place in the course of inter-state trade or
commerce".
v. Article 286 was amended so as to read as follows:

"Restriction as to imposition of tax on the sale or purchase of goods:

(1) No law of state shall impose, or authorize the imposition, of a tax on the sale or purchase of goods where such
sale or purchase takes place of goods where such sale or purchase takes place:
a) Outside the state; or
(b) In the course of the import of goods into or export of goods out of the territory of India.
(2) Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any
of the ways mentioned in Clause (1).
(3) Any law of a state shall, in so far as it imposes, or authorizes the imposition of a tax on the sale or purchase of
goods declared by parliament by law to be of special importance in inter-state trade or commerce, be subject to
such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament
may by law specify". The effect of these diverse changes made by the Constitution (Sixth Amendment) Act, 1956,
was to invest Parliament with exclusive authority to enact laws imposing tax on sale or purchase of goods where
such sale or purchase takes place in the course of inter-state trade or commerce. In exercise of the authority so
conferred, Parliament enacted the Central Sales Tax Act, 1956 (Act 70 of 1956).

Central Sales Tax Act, 1956

In exercise of the authority conferred by the amended Article 286, Parliament enacted Central Sales Tax (CST) Act,
1956. The CST Act deals with the problems of taxing inter-State sales and multiple taxation of goods of "special
importance" entering into inter-state trade and export and import transactions. It aims at:
Devising a system of taxation of inter-state sales so as to check discrimination against intra-state trade while
providing a small share of tax space to the exporting state and avoiding multiple taxation of goods of special
Importance The CST Act determines the suits of a sale (in which the different ingredients of a sale take place in more
than one state) with reference to the principles contained in Section 4 of the CST Act. The key factor taken into
account for determining the place of sale is the location of goods at a particular time. For the specific or ascertained
goods, this particular time is the time the contract of sale is made and for the unascertained or future goods it is the
time when their appropriation to the contract of sale takes place.
The CST Act defines an inter-state sale under Section 3 as one which occasions the movement of goods from one
state to another, or is affected by a transfer of documents of title to the goods during their movement from one state
to another.
Although it is plausible that the flow of inter-state commerce would be at its maximum if it were immune from
taxation, it is possible that the consumers could get out-of-state goods cheaper (without tax) than the local goods
subject to tax and local dealers would suffer a competitive disadvantage as compared to outside dealers. More
importantly, no tax would be collected on such transactions. In addition, absence of taxation causes some economic
waste in transportation by encouraging persons to make their purchases out-of-state tax- free Keeping these aspects
in view, the inter-state sales tax has been fashioned to serve three objectives:
(i) maintaining competitive conditions between local dealers and out of state dealers;
(ii) ensuring that the exporting states get a small part of the total tax that is livable on a given commodity and
regulating and monitoring inter-state trade. Accordingly, the CST Act originally prescribed two different rates
of tax: (i) one percent on inter-state sales to registered dealers; and (ii) 10 percent on inter-state sales to
unregistered dealers.
Conclusion:
The Taxation Enquiry Commission (1953-54) recommended in its report that the central government should levy a
lower rate of central sales tax at one percent on inter-state sales. This recommendation was based on the reasoning
that there must be a means for monitoring and regulating the flow of inter-state trade and that the producing states
could be given a small share of the total tax that would be/could be levied on any given commodity. Subsequently, the
qualifying condition mentioned by the Taxation Enquiry Commission while recommending the levy of CST, namely, that
it should be at a very low rate, was not heeded and the rate of CST was raised by stages to four per cent. At this level
CST began to create distortions, acted as a barrier to trade and led to large enterprises including most important
manufacturing public enterprises sending their goods on consignment transfers to their respective stockyards in
different states to avoid CST. A CST would have created much greater harm to the economy if it had been a relatively
open one. Within the closed economy framework with quantitative restrictions on imports as well as high tariff rates,
escalation of costs and the fragmentation of the market caused by the CST were not made visible. Industries were
protected, but high costs and inefficiency were the inevitable results.
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Central and state relation: Division of power between the union and the state government

Generally three models are following in the matter of division of power in a federation. In first model- the powers of
central are defined and residuary power are left to the states this American model. In second model- the power of
the federating unit or state are defined and the residuary power are given to center in Canada model. In third model-
the power of both the government are clearly laid down. Australia has this model of federation.
In India we follow the combination of both the Canadian and the Australian models. The constitution of India divides
powers between the union and the state governments. The seventh schedule of the constitution include three lists of
subjects the union list, the state list and the concurrent list.

The union or center government has exclusive power to make laws on the subjects who are mentioned in union list.
The state has the power to make a law on the subject which is include in state list. Both the central and state
government can make law on the subjects mentioned in concurrent list.

Finally the subjects which are not mentioned in the above three list are called residuary power and union
government can make a law on them. It may be noted that in making law on the subject of the concurrent list the
central government has more authority that state government and on the subjects of the state list also the central
government has indirect control. All this shows through the Indian constitution has clearly divide power between the
two governments yet the central government has been made stronger than state government.

We can discuss the division of power between the two governments in India under three headings such as financial
relation, administrative relation and legislative relation with reference to the three lists.

Financial Relation:
To run the administrative property both the central and the state government need adequate source of income. The
income of government comes mainly from various taxes imposed by it. In financial relations between the two
governments we will discuss how the sources of income are adjusted between the governments. There are certain
taxes like land revenue tax on agriculture income estate duty etc., which are levied and selected by states. They are
the source of state revenue. Some taxes are there like stamp duty, excise on medicine toilet preparation etc, which
was levied by the union but collected and appropriate by state. There are some other taxes also which are source of
income of the union government alone. They are revenue earned from railways, post and telegraphs, wireless
broadcasting etc.

In financial matter also the central government is more powerful than the states. The president of India has the
power to make alternative in distribution of revenues earned from income tax between center and the state. The
center has also the power to grant loans and grant in aid to the state governments. The CAG of India Finance
commissions of India which are the center agencies also have control over the state finance.

Administrative Relation:
It is interrelation of the centre & state in its day to day functioning of its government for public welfare and
maintenance of law & order within its territory.

Legislative Relations:
It is nothing but the interrelation of the parliament and the state legislature to perform its legislative functions,
whether primary or secondary.
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Inter-governmental Tax immunities in a federal system

A principal established under constitution law that prevents the federal governmental and individual state
governments from including one another’s sovereignty. Inter-government taxation Immunities or the Doctrine of the
Immunity of Instrumentality which is in Article 285 to 289 of Indian Constitution and also said that exemption or
restriction of imposition of taxes on other government.

The doctrine of inter-governmental immunities was for the first time recognized by the American Supreme court in
the leading case of Muchullach V/s Maryland (1819). The rule of mutual exemption from taxation has been
recognized by Art 285 to 289 of Indian Constitution. The rule of immunities from state taxation applies only to the
instrumentalities of union of India and not to private bodies.

Exemption of union property from state taxation (Art. 285)

The property of the union shall save in so far as parliament may by law otherwise provide exempt from all taxes
imposed by a state or by any authority within a state.
Nothing in clause (i) shall until parliament by law otherwise provides prevent any authority within state from having
any tax on any property of union to which such property was immediately before the commencement of this
constitution liable or treated as liable so long as that continues to be levied on the state.

Exemption from taxes on electricity (Art. 287)

Save in so far as parliament may by law otherwise provide no law of state shall impose or otherwise the composition
or a tax on the consumption or sale of electricity (whether produced by a government or other person) which is :
a. consumption by the government of India for that government or
b. consume in the construction maintenance or operation of any railway by the govt. of India or a railway company
operate that railway or sold to that government or any such railway company for consumption in the construction,
manufacture or operation of any railway and any such law imposing or authorizing the imposition of a tax on the sale
of electricity shall secure that the price of electricity sold to the govt. of India for consumption by that gover5ment or
to any such railway company as aforesaid for consumption in construction, maintenance or operation of any railway
shall be less by the amount of the tax than the price charge to other consumes of a substantial quality of electricity.
Exemption from taxation by state in respect of water or electricity in certain cases (Art. 288)
Save in so far as the President may by order otherwise provide no law of state in force immediately before the
commencement of this constitution shall impose or authorize the imposition of a tax in respect of any water or
electricity stored generated, consumed, distributed or sold by any existing law or any law made by parliament for
regulating or developing any interstate river or river valley.
The legislature of state may by law impose in authorize the imposition of any such as maintained in clause (i) but no
such law shall have any effect unless it has after having been reserved for the consideration of the president secure
his assent and if any such law provides for the fixation of rates and other incidents of such tax by means of rules or
orders to be made under the law by any authority the law shall provide for the provisions consents of the president
being obtained the making of any rule or order.

Exemption of property and income of a state from India Taxation (Art. 289)
a. The property and income of state shall be exempted from union taxation.
b. Nothing in clause (i) shall prevent the union form imposing or authorizing the imposition of any tax such extent of
any as parliament may by law provide in respect of a trade or business of any operations connected there with or any
property used or occupied for the purpose of such trade or business or any income accruing or arising in connecting
there with.
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Circumstances where tax laws are presumed violate of constitutional guarantee of right to equality.

Right to equality and taxation law have wide range of discrimination create. But this discrimination need for the
classification for taxing purpose. Right to equality need to valid classification or reasonable classification otherwise it
is violation of the fundamental right (Art. 14) but in the waived the tax on income or property that is unequal so it is
said to be violation of right to quality. According to article 14 of constitution of India “the state shall not deny to any
person equality before the law or the equal protection of laws within the territory of India”.
Article 14 and Taxation law

The state has wide power in selecting person or objects to tax and statute is not open to attack on the ground that it
taxes some person and object and not others. But it does not mean that a taxation law can claims immunity from the
equality clauses in Article 14 of constitutions. But the state has in view of the intrinsic complexity of fiscal adjustment
of diverse elements, a considerable wide discretion in the matter of classification for taxing purposes. The legislature
has ample freedom to select and classify persons distrusts goods properties income and objects which it would tax
and which would not tax.

So long as classification made within the wide range and flexible range by a taxing stature does not transgress the
fundamental principle underlying the doctrine of equality.
It is not objectionable on the ground of discrimination merely because it taxes or exempts from tax some income or
object and not others. It is not the mere fact that a tax falls more heavily on some in the same category is by itself a
ground to render the law invalid.

It is only when within the range of its selection the law seprates unequally and cannot be justified on the basis of a
valid classification that there would be the violation of Art. 14.

The SC says in IT Officer Shillong V/s NCR Rymbat AIR 1976 SC 670, that taxation will be struct down as violation of
art 14 of there is no reasonable basis behind the classification made by it or if the same class of property similarly
situated in subject to unequal taxation. This requirement does not perched the classification of property
trade/profession and events for taxation subjecting one rate of taxation and another to different rate perfect quality
in taxation is impossible and unattainable.
Conclusion:
There is some of the case law which discusses how and where tax exemption can be made in relation to Art. 14. It
would be very unreasonable to impose the same rate of tax on the person staying in a lower class like hotel. It would
be very unreasonable that the person who is staying in a 5-star hotel would be in condition to pay higher rate of tax,
where tax can be said to be progressive.
As the income of a person increase the amount of tax which he has to pay would also increase. A person who is going
to a position to spend good money for food unlike a person who goes ta a small restaurant which does not impose tax
at all. Some can be seen in our real life example; when a person goes to purchase an article on a shopping mall, he
would have to pay extra taxes for the purchase which he makes but if he purchases the same article from an open
market shop, He would not able to pay tax and even if open market shops provide bill usually they do not impose tax
when you eat a burger at a small shop you don’t have to pay the tax imposes on the burger at MacDonalds; There you
have to pay the people who are going to good places would be in a situation to pay the tax without any burden.
Also there is a principle which can be derived from Art 14 of the Indian Constitution that unequal person cannot be
treated in alike. Law takes care of every person residing in the country which it has been made for.
“Equality is not in regarding different things similarly equality is in regarding different things differently “
--Tom Robbins
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Canons of taxations

Meaning of tax
The tax revenue is the most important source of public revenue. A tax is a compulsory payment levied by the
government on individuals or companies to meet the expenditure which is required for public welfare.

Definitions
According to High Dalton “A tax is compulsory contribution imposed by a public authority irrespective of the exact
amount of service rendered to the taxpayer in return and not imposed as penalty for any legal offence.
Canons of taxation are the basic principles or rules used to build a good tax system. Canon of taxation were
originally laid down by economist Adam Smith in his famous book “the wealth of Nation’s” In this book Adam Smith
only gave four canon of taxation. These originally four canon of taxation are none known as “originally or main canon
of taxation”. As the time changed and environment become much more complex than what it was that at the Adam
Smith’s time, a need was felt by modern economist like Bastable and others to expand Smith’s principles of taxation
and as response they put forward some additional modern of canons of taxation.
Adam Smith’s four main canon of taxation
A good tax system is one which is designed on the basis of an appropriate set of principle (rules). The tax system
should strike a balance between the interest of taxpayer and that of tax authorities. Adam Smith was the first
economist to develop a list of canon of taxation. These canons are still regarded as characteristic of features of good
tax system.
Adam Smith gave following four important canons of taxation:
A. 1. Common of Equality 2. Canon of certainty
3. Canon of Convenience 4. Canon of Economy
Additional canons of taxation (By Bastable)
5. Canon of Productivity 6. Canon of Elasticity
7. Canon of Flexibility 8. Canon of Simplicity
9. Canon of Diversity
We shall briefly describe them as follows:
Canon of Equality: Every fiscal economist, along with Adam Smith, stresses that 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. Hence, a tax system should contain progressive tax rates based on the tax-payer’s
ability to pay and sacrifice.
Canon of Certainty: Taxation must have an element of certainty. According to Adam Smith, “the tax which each
individual is bound to pay ought to be certain and not arbitrary. 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.”
The certainty aspects of taxation are:
1. Certainty of effective incidence i.e., who shall bear the tax burden.2. Certainty of liability as to how much shall be
the tax amount payable in a particular period. This the tax payers as well as the exchequer should unambiguously
know. 3. Certainty of revenue i.e., the government should be certain about the estimated collection of revenue from
a given tax levied.
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. According to Adam Smith, “Every tax has to be
contrived as both to take and keep out of the pockets of the people as little as possible over and above what it brings
into the public treasury of the state.”
Owing to the complex and ever-changing nature of taxation laws in India, government has to maintain elaborate tax
collection machinery with a large staff of highly trained personnel involving high administrative costs and inordinate
delay in assessment and collection of tax.
Canon of Convenience: According to this canon, tax should be collected in a convenient manner from the tax payers.
Adam Smith stresses: “Every tax ought to be levied at the time or in the manner in which it is most likely to be
convenient for the contributor to pay it.” For example, it is convenient to pay a tax when it is deducted at source from
the salaried classes at the time of paying salaries.
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.
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. This is what is rarely found in the Indian tax
structure.
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. In the former case, the tax payer will not be burdened with a high incidence of tax in the
aggregate.
Canon of Expediency: This suggests that a tax should be determined on the ground of its economic, social and
political expediency. For instance, a tax on agricultural income lacks social, political or administrative expediency in
India and that is why the government of India had to discontinue it.
Conclusion: The tax structure is part of economics organization of a society and therefore fit in its overall economic environment. There is no
tax system exist which not satisfy these basic condition can be termed as good one.
However the state should pursue mainly following principles in structuring its tax system: The primary aim of tax should be to raise revenue
for public welfare. The people should be asked to pay taxes according to their ability to pay and assessment of their taxation asperity should
be made primarily on the basis of income and property. Tax should not be discriminatory in any aspect between individuals and also
between various groups.