Canons of Taxation

Meaning of Canons of Taxation:

The canons of taxation simply means the characteristics or qualities which a good tax system
should possess. In fact, canons of taxation are related to the administrative part of a tax. They
relate to the rate, amount, and method of levy and collection of a tax.

Canons of Taxation are considered as fundamental principles of taxation. A good tax system
should have a proper combination of all kinds of taxes having different canons.

History/Origin

The canons of taxation were first presented by Adam Smith in his famous book ‘The Wealth of
Nations’ in 1776. These canons of taxation define numerous rules and principles upon which a
good taxation system should be built. Although these canons of taxation were presented a very long
time ago, they are still used as the foundation of discussion on the principles of taxation.

Types of Canons of Taxation:

According to Adam Smith, there are four canons of taxation on the administrative side of public
finance which are still recognised as ‘classic’.

To him a good tax is one which contains:

1. Canon of equality or equity.

2. Canon of certainty.

3. Canon of economy.

4. Canon of convenience.

1) Canon of Equality:

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.

Every fiscal economist, along with Adam Smith, stresses that taxation must ensure justice.
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.

. Not only does it bring social justice, it is also one of the primary means for reaching the equal
distribution of wealth in an economy.

2) Canon of Certainty:

Taxation must have an element of certainty.

The tax which an individual has to pay should be certain and not arbitrary. According to A.
Smith, the time of payment, the manner of payment, the quantity to be paid, i.e., tax liability,
all ought to be clear and plain to the contributor and to everyone. It must be certain to the
taxpayer as well as to the tax-levying authority.

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.

3. Certainty of revenue i.e., the government should be certain about the estimated collection
of revenue from a given tax levied.

3) Canon of Economy:

This canon implies that the cost of collecting a tax should be as minimum as possible. Any tax
that involves high administrative cost and unusual delay in assessment and high collection of
taxes should be avoided altogether.

The tax laws should be made simple, so as to reduce the expenses in maintaining people’s
income tax accounts, i.e., administrative expenditure to be kept at a minimum. The tax should
be such that the maximum part of the collected revenue goes into the government treasury.

4) Canon of Convenience:

According to this canon, tax should be collected in such a manner that provides the greatest
convenience not only to the tax payers but also to the government. This can be done in many
ways such as income tax collected at source, sales tax collected at the time of sales and land tax
collected after harvest. Thus, it should be convenient and trouble-free as far as practicable.
These canons of taxation are observed, of course, not always faithfully, by modern
governments. Hence these are basic and classic canons of taxation.

To these four canons, economists like Bastable have added a few more which are as under:

5. Canon of elasticity.

6. Canon of productivity.

7. Canon of simplicity.

8. Canon of diversity.

9. Canon of expediency

Adam Smith originally presented only 4 canons of taxation, which are also commonly referred to as
the ‘Main Canons of Taxation’ or ‘Adam Smith’s Canons of Taxation’. Along with the passage of
time, more canons were developed to better suit the modern economies.

{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.}