What is tax? Tax is a compulsary contribution from a person to the government to defray the expenses incurred in the common interest of all without reference to special benefits conferred. This means any country has the right to tax. The refusal to pay tax is a punishable offence if one is liable to pay tax. There are certain canons or principles of taxation, it will be discussed here, along with the meaning of direct and indirect taxes.
Canons or principles of tax were laid down by Adam Smith, these different canons are, canon of equity, cannon of certainty, canon of convinience and canon of economy. The various explanations are as follows:
- Canon of equity- Canon of equity refers to the fact that taxes should be imposed on people who have the capacity to pay taxes. It clearly states that the poor should be taxed less and the rich should be taxed more, this brings about balance. Here, everybody contributes according to their ability and the cost of the government is borne by everyone.
- Canon of certainty- This principle refers to the fact that the tax payer should be aware of the amount of tax to be paid and the rate of tax to be applied.
- Canon of convinience- Payment of taxes should be convinient and should be of less burden to the tax-payer.
- Canon of economy- This principle states that the cost of collecting the revenues should be very minimum. A lot depends on the tax laws and the tax procedures should be simple, as it reduces the cost.
Direct tax- Direct taxes refers to the taxes which are paid directly by the tax payer to the govenment such as any income tax, property tax, etc. It is based on the tax payer’s capacity, ie, if the tax-payer can pay more then , they will be taxed more and vice-versa.
Certain advantages of direct tax are as follows:
- Promotes equality- As these are based on the ability to pay, it promotes equality among tax payers.
- Promotes certainty- Certainty refers to the fact that these direct taxes are certain to be paid based on the level of income earned by the tax payer.
- Elasticity- Earnings are flexible, they can be more or less, and thus, taxes are to be paid accordingly by the tax-payer.
Certain disadvantages of direct tax are as follows:
- Inconvinient- Direct taxes are inconvinient when it comes to paying. These are of a larger amount and can cause burden on the tax-payer.
- Evadable- Direct taxes are evadable if the tax-payer forges and submit his files which does require taxes to be paid according to Income tax rules.
Indirect taxes- Indirect taxes refers to those taxes who’s burden of payment can be passed on to others. They are usually imposed on the manufacturer or supplier and the burden falls on the end user or consumer. Examples of indirect taxes include VAT, GST, excise duty, etc.
Certain advantages of indirect taxes are as follows:
- No burden on the poor and rich- Indirect taxes have no burden on the rich as well as poor as they feel they are not being taxed as the amount of tax is very negligible amount.
- Cannot be avoided- Indirect taxes cannot be avoided unlike direct taxes.
- Collection is easy- Unlike direct taxes, collection of indirect taxes are easy as they are to be paid on the consumption of goods and services.
- Discourages consumption of harmful products- Products such as alcohol, cigarettes, tobacco, etc. are heavily taxed, thus, their consumption will be less, thus, saving taxes.
Certain disadvantages of indirect taxes are as follows:
- Regressive- Indirect taxes are regressive in nature. This means that the prices of commodities are the same no matter rich people buy these or poor people. They are unfair as both have to pay the same.
- Uneconomical- The cost of collection of any indirect taxes are very high. Each and every source of production and consumption needs to be looked at. A larger administrative staff is required which turns out to be expensive.
- Harmful to industries- Raw materials are taxed, this becomes harmful for industries who want to supply them. This increases cost of production and have a negative impact on profits.