CANONS OF TAXATION

Canons of taxations are the guiding rules and principle to make tax collection system effective
and functional. The government has to build the structure that can make tax collection simple
and effective. Therefore, certain rules and principles have to be followed in order to do the same.
Thus the economist Adam Smith presented four basic rules and principles of proper tax policy in
his famous book The Wealth of Nations. His maxims are often referred to as the four canons of
taxation. Namely

(1) equity,
(2) certainty,
(3) convenience, and
(4) economy.

These 4 have been discussed in detail below.

1. Equity
 Equality means treating everyone equal but here, the term equality is used with regard to
the ability to pay. In this context, equity means that the taxes people or organizations
have to pay should be proportional to their income. That means the more money a person
earns, the higher their taxes should be and vice versa. This idea is commonly known as
the ability-to-pay principle. The idea behind this is that the people who can afford to pay
more taxes should pay more than those who cannot afford to pay as much. As considering
everyone equal would result in payment of the large amount by low-income group or
payment of the same amount i.e. less, by the high-income group.
 While taxing the person, the government must know which person belongs to which
income group and then the individual must be taxed.
 Adam Smith argued that the taxes should be proportional to income, i.e. citizen should
pay the taxes in proportion to the revenue which they respectively enjoy under the
protection of the State.
 Adam Smith had rightly stated as this would reduce the gap between the rich and poor. If
there would be no such principle, the gap between the rich and poor would only increase
with the time. In simple word, we can say that taxing the individual according to his
 ability to pay results into the equal distribution of wealth in the economy. Because of this
principle of Adam Smith, the government has made the different tax slabs so that the
sacrifice made by the individual in a monetary term shall be equal.

2. Certainty
 Certainty refers to the idea that taxes should be clear and transparent. That means
everybody should know or quickly find out how much they have to pay, when they have
to pay, and how they have to pay their taxes. This is important because it allows
taxpayers to consider their taxes when drawing up a budget. In addition to that, it has
been shown that transparency increases public acceptance.
 The ‘Canon of Certainty’ according to him, is the the tax which individual is bound to
pay ought to be certain, and arbitrary’. The amount of tax, the manner of payment, and
the person to whom it is to be paid shall be certain so that the individual shall be
informed well in advance about the amount that is to be levied as a tax. If the tax system
is not certain, it may lead to harassment of an individual. This principle of certainty states
that tax should not be arbitrarily fixed or imposed by the income tax authorities.
Moreover, lack of certainty in the tax system, as pointed out by Smith, encourages
corruption in the tax administration.
 In other words, we can say, individual who is paying tax, it has to pay the same, in a
complicated manner, shall restrain him in doing so because of the hardship and problems
that he has to face while paying tax. Also, if an individual is unaware of the amount of
tax to be deducted from his income in advance then he may get demotivated to do
investment bearing high risk if he is a businessman. Therefore, the tax system must be
certain and not arbitrary. Uncertainty along with arbitrariness would defeat the very
purpose of the tax system.

3. Convenience
 Another important canon of taxation is ‘Canon of Convenience’. As the word
‘convenience’ per se means to make easy, simple and comfortable. According to him,
“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”. The payment and manner of payment of taxable
 amount must be convenient to the person paying the same. If the tax collection
mechanism is complex, it would lead to frustration and dissatisfaction to the contributor.
A good taxation system is one, which is convenient to the contributor. Income tax is
always collected on the preceding year of the assessment year. That means the tax is
deducted only when the income is earned by the individual. If this would not be the case
then the situation may arise, where the burden of paying the tax would be on the
contributor, not having earned the income.
 An example of the above priciple is that the Income tax authority cannot tax the amount
which is not earned. It may create an absurd situation, where tax is deducted on the
amount, not in existence. Apart from this, another important aspect is, after earning
income, how the tax collection must be done so as to make it convenient.
 The best example of this is Tax Deducted at Source (TDS). TDS means “deduction of tax
from the source it has been generated”. It is the obligation of the employer to deduct the
tax before crediting the salary of the employee in his/her account and the tax so deducted
shall be paid to the government, when due. This relieves the employee from paying the
tax.
4. Economy
 A good tax system is where the cost of collecting the tax is minuscule to that of the
amount collected. The government shall always endeavour to lower down the expense
incurred on the tax collection so as to have the larger amount to its treasury. The very
purpose of tax collection is to generate revenue for the government but the same is
defeated when the expense gets increased. Therefore, this canon of taxation is significant
in adopting the method of collection.
 In this context, economy refers to the idea that the cost of collecting taxes should be
minimized. That means the government has to ensure that the collection of taxes only
requires the least possible expenditure. The reasoning behind this is that most of the
money collected through taxes should be used to fund projects that, in turn, benefit the
taxpayers.
 To illustrate this, imagine that the collection of federal income taxes was costly and
accounted for about 90 percent of all tax revenues. That means only 10 percent of the
total tax revenue could be used for projects that actually benefit the taxpayers, while most
 of the money would go elsewhere. In that case, the population would most likely be
dissatisfied with the tax and demand a more efficient system.

 OTHER CANONS OF TAXATION

These are the four canons that were given by Sir Adam Smith. But any principle so framed or
proposed would not be exhaustive. This is so, because of the dynamic nature of the society. A
progressive society is always subject to the changes and these changes have to be adopted by the
government in order to make the tax collection mechanism effective and efficient. Some other
canons that govern the principles of taxation are as follows:

5. Canon of Simplicity
 A simple tax structure must fetch or generate more revenue for the government. Where
the whole of the tax structure is simple, it doesn’t create the confusion and is easy to
understand. Tax rates must be simple. Where it is complex, it may lead to confusion and
thereby the contributor may abstain from paying such tax.
 Canon of Simplicity along with the other canon plays a significant role in the effective
and efficient functioning of the tax system. Goods and Service tax is one such example to
encourage people to pay the tax without getting stuck into the technicalities of different
tax. Goods and service tax has made the tax structure simple and productive.
6. Canon of Productivity
 Imposition of tax must not bypass the rule of productivity i.e. production in the economy.
Tax amount of tax shall not be arbitrarily fixed and imposed on the individual so as to
discourage him to make further investment.
 But this does not mean to the imposition of the tax in favour of the big shots of the
country. The government shall impose the tax in such a way to make it productive i.e.
yielding sufficient revenue.
7. Canon of Flexibility
 Tax structure must be flexible enough that it moves along with the economic growth.
When there is an increase in the people income, the revenue of the government shall
increase. This is best applicable in case of indirect taxes.
  For example, the imposition of the high tax in high-end goods or luxury goods and
services. Similarly, when there is a decrease in the income of people, the tax shall also be
decreased accordingly.
8. Canon of Diversity
 Taxation must be dynamic. This means that a country’s tax structure ought to be dynamic
or diverse in nature rather than having a single or two taxes. Diversification in a tax
structure will demand involvement of the majority of the sectors of the population.
 If a single tax system is introduced, only a particular sector will be asked to pay to the
national exchequer leaving a large number of population untouched. Obviously,
incidence of such a tax system will be greatest on certain taxpayers. A dynamic or a
diversified tax structure will result in the allocation of burden of taxes among the vast
population resulting in a low degree of incidence of a tax in the aggregate.

ER=As SR is not present here therefore the greater no. between FR and MV shall be taken which
is FR