Week 1

Ingredients of a tax

 Not voluntary / Enforced contribution

 Payable in cash
 Proportionate in character
 Levied for public purposes
 Levied by the law-making body
Purpose of taxation

 Revenue for the government

 Non-revenue or regulatory
Canons of taxation

 Canon of Equality
 Canon of Certainty
 Canon of Convenience
 Canon of Economy
 Canon of Productivity : It is much better to have a few taxes which yield good
revenue instead of many taxes yielding a little
 Canon of Simplicity : Along with the canon of certainty, where the amount,
time duration and manner of payment is made certain, the canon of simplicity
avoids cases of corruption and tax evasion if the entire method is made simple
and easy.
 Canon of Diversity: Being heavily dependent on a single tax source can be
detrimental for the economy. Canon of diversity states that it is better to
collect taxes from multiple sources rather than concentrating on a single tax
source.
 Canon of Elasticity and Canon of Flexibility: Elasticity means when the
government increases taxes, they should actually get more revenue.
Flexibility means the tax system should have the ability to easily increase or
decrease taxes.
Incidence and Impact of Tax

 The final burden of tax is known as tax incidence and the initial burden of tax
is known as tax impact. Tax incidence is upon the person who eventually pays
it and the tax impact is upon the person from whom the tax is collected. 
Principles of Taxation

 Efficiency: The higher the tax rate on, and the price elasticity of demand for,
the taxed goods are, the higher is the loss in efficiency or welfare.
 Equity
 Stabilization : Automatic stabilizers offset fluctuations in economic activity
without direct intervention by policymakers. When incomes are high, tax
liabilities rise and eligibility for government benefits falls, without any
change in the tax code or other legislation.
Fiscal Policy Design

 Fiscal policy is the use of government spending and taxation to influence the
economy.
Problems with the Indian Tax System

 Indian tax system is characterized by low revenue productivity and stagnancy in

the tax ratio.
 The most important factor for the low revenue productivity of the Indian tax
system has to be found in the narrow tax bases.
 There are a variety of reasons rendering the tax bases narrow and these include
 the fragmented Constitutional assignment
 multiplicity of objectives assigned to tax policy resulting in complications in the tax
laws, wide avenues for evasion and avoidance and large and increasing amounts held in
disputes
 tax abuse by multinational companies resulting in base erosion and profit shifting and
 poor capacity of tax administration including the information system to effectively
administer and enforce the taxes.
Problems with Tax Administration
 lack of autonomy;
 low morale of tax administrators arising from low prospects of progression in the
careers of administrators;
 organizational problems of separation of direct and indirect tax administration and
 lack of coordination, effective communication and information exchange between them;
 area-wise rather than functional divisions and lack of functional specialization including
developing intelligence system;
 poor information system and limited use of technology for tax administration;
 perverse incentive from setting targets to tax administrators and judging their
performances based on the fulfilment of the targets;
 poor capacity to forecast revenues;
 lack of clarity in tax laws and wide discretion to tax officials and build-up of huge
amount of revenues;
 adversarial attitude of the tax administration towards taxpayers and essentially
considering them as tax evaders rather than agents who collect the tax from the people
on behalf of the tax departments.