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Friday, 20 May 2011

Define Tax and discuss the various Principles of Taxation or what are the essential of a good Tax System

Thomas has defines the tax in the following words, " A Tax is a compulsory contribution made to government under stated conditions and not a return for specific service rendered."

So in simple words we can say that it is a compulsory payment to government by a person on whom it is levied.
Following are the important principles of taxation :

1. Canon of Equality :-
By equality is meant that the rate of percentage of taxation should increase with the rise in income and decrease with the fall in income. According to this principle, every person sacrifices according his ability.

2. Canon of Certainty :-
The tax payer must be definite and certain about the amount of tax. Then he can adjust his income and expenditure in better way.

3. Canon of Convenience :-
First the amount of tax should be such, that it can be easily payable by the tax payer. Secondly, the tax amount can be received in installments. Thirdly, if the tax is received at that time when the tax payer financially feels better. For example if the tax is collected from the farmers when they have harvested the crop will be very convenient for them.

4. Canon of Economy :-
The expenses of collection of taxes should be minimum. If a government pays the maximum portion of tax revenue to the staff appointed for tax collection, it will be uneconomical.

5. Canon of Simplicity :-
If the tax system is complicated and difficult to understand then it will lead to corruption. The tax system should be very simple and plain for the tax payer.

6. Canon of Productivity :-
The tax should produce sufficient revenue to the government. A few taxes should be preferred on large number of small taxes which produce less revenue and are expensive in collection.

7. Canon of Elasticity :-
The tax should be fairly elastic so that the rate of taxes may be increased or decreased according the changing conditions of the country. Income tax, railway fares and postal rates are very good example of elastic tax.

8. Canon of Diversity :-
According to the principle, the system of taxation should include a large number of taxes which are economical. The government should collect revenue from its citizen by imposing direct and indirect taxes. Variety of taxation is desirable from the equity of yield and stability point of view.

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