WHAT IS TAX?

Table of Contents

Income tax is levied by the central government under entry 82 of the Union of Schedule Vll to constitution of India. This entry deals with, tax on income other than agricultural income.

Section 4, which is the charging section, provides that Income Tax is the tax on the total income of a person called the assesse of the previous year relevant to the assessment year at the rates prescribed in the relevant Finance Act.
Tax is the primary source of public revenue, major part of revenue income is generated from tax by the Central Government. It is a compulsory duty imposed by the government. If any individual refuses to comply with tax payments, he can be punished.
Tax is a duty of every citizen and not a penalty.The payment of tax involves some understanding and sacrifice on the part of a tax payer.

Types of Taxes:

Direct Taxes:

Direct taxes are direct in nature their impact and incidence is on the same person, they can not be shifted. These taxes are imposed on individuals, organisations and are personal in nature. For example: income tax, wealth tax.
Direct tax is one which is paid by a person on whom it is legally imposed and the burden of which cannot be shifted to any other person. The tax payer is the tax bearer. The impact (the initial burden) and its incidence (the ultimate settlement) of direct tax is on the same individual.
Direct taxes cannot be transferred to other person. The concept of shifting of tax does not apply to direct tax.

Indirect taxes:

Indirect taxes can be shifted from one individual to another. These taxes are imposed on manufactured goods in India. Indirect tax is imposed by the government and collected by a third party from the person who bears the ultimate economic burden of the tax.
This means that the final consumer has to bear the ultimate economic burden of the tax imposed. This kind of tax, intern, increases the amount of money payable for something.
Indirect tax is one in which the burden can be shifted to others, the tax payer is not a tax bearer. Impact and incidence or settlement of indirect taxes are on different persons.

The Fundamental Canons of Taxation by Adam Smith:

Canons of Taxation:

Canons of Taxation represent the main basic principles or rules laid down to establish a good tax system. Canons of taxation were first originally laid down by economist Adam Smith in his famous book the “ The Wealth of Nations”.

In this book, Adam Smith gave the following four main canons of taxation:

Canon of Equity: This principal aims to provide economic and social justice to the people. This principle or canon, states that every person should pay to the government depending upon his ability to pay. The taxes paid should be in proportion to the income generated.

Canon of Certainty: As per this canon, Adam Smith, is of this opinion that the tax payer should know in advance how much tax is to be paid, at what time he has to pay the tax and in what form the tax is to be paid to the government. This canon, ensures that the individual as well as the government should be certain about the amount that will be paid and collected respectively.

Canon of Convenience: There should be convenience in the mode and timing of tax payment. The tax system prevalent should be convenient enough for the tax payer, otherwise, an inconvinent tax collection system may lead to tax evasion.

Canon of Economy: This principle clearly states that there should be economy in tax administration. The cost of tax collection should be lower than the amount of tax collected.

Additional canons: In due course of time the government adopted the policy of welfare state which has increased significantly the expenditure of the government. Governments are expected to maintain economic stability, full employment, reduce income inequality and promote growth and development. The tax system should be structured as such, that it caters to the needs of the growing state affairs.

Canon of Productivity: Also known as the canon of fiscal adequacy. The tax system should be able to generate enough revenue for the treasury and the government should not have the need to depend on deficit financing.

Canon of Elasticity: The imposition of tax by the government should be flexible in nature.

Canon of Flexibility: There must be enough flexibility in the tax system. It should be easily possible for the government to revise the tax structure.

Canon of Diversify: There’s a need of diversification in the way the government collect taxes. If the tax revenue comes from a diversified source then any reduction in tax revenue due to any one cause is bound to be less.

Canon of Simplicity: The tax system prevalent should be simple as far as possible. It should be easy to comprehend and administer.

Characteristics of a Good Tax System:

There must be an equitable distribution of tax burden. Each and every individual must be made to pay as per his or her ability.
A tax system should be diversified. It should have various sources of income and should not rely on a single source.
A tax system must be productive in nature, it must encourage savings and investment which will lead to favourable allocation of resources.
The primary goal of the modern tax system is to generate adequate revenue to meet the public expenditure as the modern governments are welfare oriented and require adequate funds to cater to the various demands.
Good tax system should facilitate stability and development of the economy.
There should be economy in the collection of taxes. Administrative machinery should be efficient and should involve minimum cost of collection.
The tax system prevalent should be flexible enough to keep up with the changing requirements of the government and the economy.
The tax system, framed should be simple, certain and convenient. It should acknowledge the basic rights of the tax payer.