TAX SYSTEM

MEANING AND CLASSIFICATION

Chapter 12
 Definitions
A tax is a compulsory contribution imposed by a public authority, irrespective of the exact amount of
service rendered to the tax- payer in return, and not imposed as a penalty for any legal offence.

-Huge Dalton

Taxes are compulsory payments to the government without expectation of direct return or benefits to
the tax payer.
-P.E.Taylor

A compulsory contribution from a person to the Government to defray the expenses ensured in the
common interest of all, without reference to special benefits conferred.

- E.R.A Selignman
 TAXES
Features Objectives

1. Compulsory Contribution 1. Mobilization of resources

2. Spent by the state in common interest of 2. Removes disparities in distribution of

all. income and wealth

3. Personal Obligation 3. Provides incentives for capital formation

4. Check inflationary tendencies

CANONS OF TAXATION
– ADMINISTRATIVE DIRECTION TO TAX AUTORITIES

1. Canon of Equity
2. Canon of Certainty 4 CANONS MENTIONED IN ‘WEALTH
OF NATION’ OF ADAM SMITH.
3. Canon of Convenience
4. Canon of Economy
5. Canon of Productivity
6. Canon of Elasticity
7. Canon of Simplicity
8. Canon of Diversity
 JUSTICE
IN
TAXATION

BENEFIT ABILITY
PRINCIPLE PRINCIPLE

EQUAL
SACRIFICE
PRINCIPLE
BENEFIT PRINCIPLE
◦ According to this the burden of taxation should be divided on the basis of benefits enjoyed.
◦ Has 2 variants/ interpretation-
a) Value of service principle- on proportion of services availed by them
b) Cost of service principle- on cost incurred by the govt in rendering the services.

However tax has no reference to benefit, only common benefit. Therefore limitations-
i. Subjective matter, not possible to levy on quid pro quo basis
ii. Not practicable to apportion the general benefit of the state.
iii. It will imply poor will have to pay more, which is unsound proposition.
iv. This will come in way of equitable distribution & stabilization of economy.
ABILITY PRINCIPLE
o According to this, each individual
should contribute to the govt in
proportion to ability to bear & pay
taxes.
o Greater the ability, higher should be
the rates of taxes.
o Justified on the basis of equity &
diminishing marginal utility of income.
EQUAL SACRIFICE PRINCIPLE –J.S. Mill
◦ Subjective interpretation of ability to pay principle in terms of ‘sacrifice’.
◦ Implies, all persons in a similar position should be treated equally.
◦ Interpretation-
i. Equal Absolute Sacrifice
ii. Equal Proportional Sacrifice
iii. Equal Marginal Sacrifice

3 Objective criteria’s-
a. Income
b. Wealth
c. Expenditure
CLASSIFICATION
DIRECT TAX INDIRECT TAX

◦ Definition- “A direct tax is really paid by the person ◦ Definition- “An indirect tax is imposed on one person, but
on whom it is legally imposed” paid partly or wholly by another.” (imposed on G&S)

◦ Borne- Levied on person who pays directly to govt. ◦ Borne- someone other than from whom collected in the
initial instance.
◦ Money burden & Real burden on same person. ◦ Money burden & Real burden may be on different
person.

◦ Tax burden cannot be shifted. ◦ Tax burden can be shifted.

◦ E.g.- Sales tax, Excise duty etc.
◦ E.g.- Income, Wealth, Gift, Toll, Estate duty etc.
◦ Regressive.
◦ Progressive.
◦ Major source in developing & least developed
◦ Major source in developed economies. economies.
(1) DIRECT TAXES
MERITS DEMERITS

Equitable Tax evasion

Elasticity Inconvenience

Certainty Adverse effect on investment

Civic Consciousness Uneconomical

(2) INDIRECT TAXES
MERITS DEMERITS
◦ Convenience ◦ Inequitable

◦ Tax evasion difficult ◦ Uncertainty

◦ Wider Base ◦ Tax Evasion

◦ Welfare

◦ Flexibility
PROGRESSIVE, REGRESSIVE, DIGRESSIVE & PROPORTIONAL TAXES
 PROGRESSIVE REGRESSIVE

◦ Tax rate rises with increase in Income. ◦ Rate of tac declines with increase in
◦ Better distribution of income income.

◦ Economic welfare ◦ Prevalent in Europe before French

Revolution during Feudalism.
◦ Satisfies the principle of justice or
◦ Falls heavily on poor.
equality.
◦ Justified in the basis of law of diminishing ◦ Violates principle of justice.
marginal utility of money. ◦ Undermine social welfare.
◦ Reduce unnecessary & unproductive ◦ Lacks elasticity.
expenditure.
◦ Favored in West & Welfare State.
 PROPORTIONAL DEGRESSIVE

◦ People are required to pay at a ◦ Tax rate increase up to a certain

uniform rate, irrespective of limit, after that a uniform rate is
income. charged & become constant.
◦ Involves unequal marginal ◦ Rate of progression in taxation
sacrifice. does not increase in the same
◦ Equal absolute sacrifice. proportion as the income increases.
◦ Doesn’t disturb existing pattern of
distribution.
◦ Lacks justice & equality.
◦ Greater sacrifice for poorer.
Characteristics of a good tax structure
- just & equitable & its economic effects are desirable

1) Equity

2) Productivity

3) Elasticity

4) Helpful in realizing economic objectives

5) Administrative feasibility
INDIAN TAX STRUCTURE
FEATURES EVALUATION

a. Equity (No)
a. Equity
b. Elasticity (Yes)
b. Predominance of Indirect taxes
c. Adequacy (No)
c. Built-in flexibility and buoyancy
d. Efficiency (No)
d. Inter- sectoral Imbalances
Taxes by Central & State government
CENTRE
◦ Tax source- 7tH Schedule, Union List, items 82
to 92(a).
◦ Union list (list 1) contains 12 items. Items
appearing in the list does not all accrue
exclusively to the Centre.
◦ Page 12.15
STATE
◦ Tax source- 7th Schedule, State List, items 45 to
63.
◦ List contains 19 items
◦ Besides these independent tax sources, they
have share in Union taxes also.
◦ Article 274- safeguard state financial interest.
◦ Article 275- Professional tax up to Rs.250p.a.
◦ Article 293- state to supplement income
through public loans.
◦ Grant-in-aid from Centre.
◦ Page 12.16
 DIFFERENT ITEMS IN UNION LIST

Taxes & duties L, C & R - CG Article 271- empower Article 292- Govt can e.g. Custom duties
Accruing wholly to parliament to levy borrow on security comprising export
CG surcharge from CFI. duties, corporate tax
etc.

Taxes & Duties Levied L, C - CG Article 268- sharing of *Income tax- *Excise duty-
& Collected by CG, R - CG & SG the proceeds of central Constitutional permissive or
but Proceeds Shared tax on income & necessity. discretionary.
with state excise duty.

Taxes & Duties Levied L, C - CG Article 266 (2) e.g. Page 12.16
& Collected by CG, R - SG
but Proceeds Wholly
distributed among state

Taxes & Duties Levied L – CG Centre fixes the rate. e.g. Stamp duty &
by the CG,but C, R - SG excise duty on medical
Collected & & toilet preparation
Appropriated by the
States