Introduction to Taxation

Introduction

A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer by a governmental organization in order to fund government spending and various public expenditures. Taxation, imposition of compulsory levies on individuals or entities by governments. Taxes are levied in almost every country of the world, primarily to raise revenue for government expenditures, although they serve other purposes as well.

Features

• Tax is a legal collection. A tax has "statutory sanction". It cannot be imposed arbitrarily Certain legal requirements are to be followed in imposing a tax. 
• Tax is a personal obligation A tax is a personal obligation and it creates personal responsibility on the tax payer. 
• Tax is a compulsory contribution : Nobody can refuse to pay taxes claiming that he does not derive any benefit from payment of tax Refusal to pay tax is a punishable offence 
• Element of Sacrifice In the payment of taxes 
• Tax is imposed by Government alone 
• Revenue collection The power of taxation is used to raise sufficient revenues for the State, apart from achieving other collateral objectives. 
• Socio-economic objectives. Modern governments use tax as an instrument to achieve structural changes and also realising socio-economic objectives.
• Tax is a contribution for the common benefit of the society 
• Benefit is not a condition for tax payment : The tax payer is not promised any specific benefit. 
• Tax is not imposed to realise cost of benefit 
• Taxes may be assessed on capital or Income but they are paid out of income. 
• A tax may be imposed on a commodity or property or individual. But tax is actually paid by individuals.

Objectives of Taxation

The basic objective of taxation is to raise resources for the State.  It can be used to reduce inequalities, to accelerate economic development, as a tool to regulate consumption, imports and exports, in addition to its basic objective of raising revenues.

Different objectives of taxation may be summed up as under:

• Objective of raising revenue
• Regulatory objectives
  • Regulating consumption
  • Regulating production
  • Regulating imports and exports
  • Regulating the effects of inflation, depression etc.
• Developmental objectives:
  • Objective of economic development
  • Objective of capital formation
  • Objective of increasing employment opportunities.
• Objectives of reducing inequalities: 
  • Reduction in economic disparities
  • Reduction in regional imbalances.

Principles of Taxation

• Principle or Canon of Equality: The first canon or principle of a good tax system emphasised by Adam Smith is of equality. According to the canon of equality, every person should pay to the Government according to his ability to pay, that is in proportion of the income or revenue he et jove onder the protection of the State.
  Thus under the tax system based on equality principle the richer persons in the society will pay more than the poor. On the basis of this canon of equality or ability to pay Adam Smith argued that taxes should be proportional to income, that is, everybody should pay the same rate or percentage of his income as tax.
• Canon of Certainty: Another important principle of a good tax system on which Adam Smith laid a good deal of stress is the canon of certainty. To quote Adam Smith, 'The tax which each individual is bound to pay ought to be certain and not arbitrary.
• Canon of Convenience: Payment of a tax should not only be certain but the time and manner of its payment should also be convenient to the contributor. If land revenue is collected at the time of harvest, it will be convenient since at this time farmers reap their crop and obtain income.
  In recent years efforts have made to make the Indian income tax convenient to the tax payers by providing for its payments in installments as advance payments at various times during the year. Further, income tax in India is levied on the basis of income received rather than income accrued during a year. This also makes the income tax system convenient. 
• Canon of Economy: The Government has to spend money on collecting taxes levied by it- Since collection costs of taxes add nothing to the national product, they should be minimized as far as possible. If the collection costs of a tax are more than the total revenue yielded by it, it is not worthwhile to levy it. Even for achieving economy in the tax collection, the taxes should be as simple as possible and tax laws should not be subject to different interpretations.