[Commerce Class Notes] on Taxation Pdf for Exam

We can understand taxation as the route via which the government or the taxing authority imposes or levies taxes on all its citizens, businesses, and other entities. The system of taxation has been a mainstay of civilization since times. In simple terms, we can say that taxation is a financial obligation among the citizens of a country.

The term taxation applies charges to all types of involuntary levies, ranging from income tax to corporate tax to capital gains and estate taxes. The revenue that results from taxation is known as tax. Now that we have talked about the fundamentals of taxation, let us try and answer the question – what is taxation?

Taxation – An Overview

Taxation is a system wherein the government or any other authority mandates that citizens pay a fee. Taxes are involuntary, and as opposed to different types of payments, taxes don’t provide any direct services in return. Governments can levy taxes on physical assets, land, estates, and so forth. The concept of taxation is different from other types of payment as it does not entail consent and direct services in return. The government mandates taxation vis-à-vis explicit or implicit threat of force. Lastly, taxation is distinct from racket or extortion because legal authorities and not private actors impose it. Now that we have answered the question – what is taxation – let us dovetail into the canons of taxation. 

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Canons of Taxation

Pioneering economist Adam Smith put forth four basic rules and principles of fair tax policy in his famous book- The Wealth of Nations. We can understand the four maxims or dictums as the canons of taxation. 

1. Equity – Equity as a canon of taxation implies that the taxes people, institutions, or organizations have to play should be proportional to their income. As such, the higher a person’s income, the more will be the tax they have to pay, and vice versa.

2. Certainty – It refers to the idea that taxes should be clear and transparent. The notion behind ‘certainty’ is that every taxpayer should know or should have the tools to quickly find out how much tax they have to pay when they have to pay and how they have to pay their taxes. The importance of certainty is that it equips taxpayers to consider their taxes while formulating their budget. Lastly, transparency also enhances public acceptance and trust.

3. Convenience – It implies that both the timing as well as a mode of paying the tax should be convenient for taxpayers. As such, governments and other authorities should design the taxation accounting ecosystem so that people can effortlessly make their payments.

4. Economy – The last canon of taxation refers to the notion that the cost of collecting taxes should be minimized. The reasoning is that the money collected from taxes should be used for the welfare and benefit of the taxpayers. In other words, the government should ensure that the collection of taxes requires the least possible expenditure.

Purpose of Taxation

The primordial purpose of taxation is to ensure that the incumbent government can finance the various expenses incurred in running or governing the nation. Thus, taxes are levied to accumulate funds and consequently drive the many state-sponsored types of machinery. Hence, taxation galvanizes the development of a country and its citizens by promoting socio-economic growth, social security nets, and so on. Another purpose of taxing citizens and other entities is to reduce the consumption of unwanted goods. The government uses taxation as an instrument to reduce the consumption or proliferation of wanted items like alcohol, tobacco, and so on. Likewise, the government can also use taxes to protect local industries and manufacturers and enhance their profitability and development. Thus, we can answer the question – what is taxation and its purpose. 

In conclusion, taxation is an indispensable part of modern civilizations. They are a crucial way to determine public life. In India, both the state and the central governments have veritable importance in determining the taxes.