Canons of Taxation: A) Canon of Equality. B) Canon of Certainty. C) Canon of Economy. D) Canon of Convenience

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Canons of Taxation

In Bangladesh, the principal direct taxes are personal income taxes and corporate
income taxes, and a value-added tax (VAT) of 15% levied on all-important consumer
goods. The top income tax rate for individuals is 25%. For the 2004/05 tax year (July 1,
2004–June 30, 2005) the top corporate rate was 45%. However, publicly traded
companies registered in Bangladesh are charged a lower rate of 30%. Banks, financial
institutions and insurance companies are charged the 45% rate. All other companies are
taxed at the 37.5% rate. Effective 1 July 2002, the VAT rate on computer hardware and
software was reduced to 7.5%, and certain agricultural equipment and electricity
supplied to the agricultural sector were exempted from VAT altogether. The VAT on the
transfer of land is also to be abolished. Essential agricultural implements and irrigation
pumps had previously been excluded from certain taxes.

Canons of taxation refer to the administrative aspects of a tax. They relate to the rate,
amount, method of levy and collection of a tax. In other words, the characteristics or
qualities which a good tax should possess are generally described as canons of taxation.
According to Adam Smith, there are four canons of taxation which are still recognised as
classic. To him a good tax is one which contains:

a) Canon of equality.

b) Canon of certainty.

c) Canon of economy.

d) Canon of convenience.

These canons indicates that Adam Smith was basically concerned with the ways in
which an economy could increase its productive capacity and thereby achieve a higher
rate of economic growth. In addition to the above four canons, the otther economists
have added a few more which are as under:

e) Canon of productivity.

f) Canon of simplicity.

g) Canon of elasticity.

h) Canon of diversity.
i) Canon of expediency.

j) Canon of functional efficiency.

Briefly describe them as follows:

1) Canon of Equality: The canon of equality or equity implies that taxation must ensure
justice. the burden of taxation must be distributed equally or equitably in relation to
the ability of the tax payers. 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.

2) Canon of Certainty: Taxation must have an element of certainty. According to Adam


Smith, “the tax which each individual is bound to pay ought to be certain and not
arbitrary. The time of payment, the manner of payment, the amount to be paid ought
to be clear and plain to the contributor and to every other person.” The tax payers
should not be the subject to arbitrariness and discretion of the tax officials, in which
case there will be a scope for a corrupt tax administration.

3) Canon of Economy: Every tax has a cost of collection. It is important that the cost of
collection should be as minimum as possible. It is useless to impose taxes which are too
widespread and difficult to administrate. According to Adam Smith, “Every tax has to be
contrived as both to take and keep out of the pockets of the people as little as possible
over and above what it brings into the public treasury of the state.”

4) Canon of Convenience: This canon recommended that unnecessary trouble to the


tax payer should be avoided. Otherwise various ill effect may result. According to Adam
Smith “Every tax ought to be levied at the time or in the manner in which it is most
likely to be convenient for the contributor to pay it.”

5) Canon of Productivity: It is also called the canon of fiscal adequacy. This canon
implies that a tax must yield sufficient revenue for the treasury and the government
should not be forced to restore to difficult financing.

6) Canon of Simplicity: This canon recommended that tax rates and tax systems
should not be too complicated. That makes it difficult to administer and understand.
Tax system ought to be simple and comprehensible.
7) Canon of Elasticity: Taxation should be elastic in nature in the sense that it become
possible for the authorities, without undue delay, to revise the tax structure, coverage
and rates and to suit the changing requirements of the economy. It means that taxation
must have built-in flexibility.

8) Canon of Diversity: Canon of diversity implies that there should be a multiple tax
system of diverse nature rather than having a single tax system. In the former case, the
tax payer will not be burdened with a high incidence of tax in the aggregate. There
should be a wide admixture of direct and indirect taxes.

9) Canon of Expediency: Taxation should be determined on the ground of its economic,


social and political expediency. For instance, a tax on agricultural income lacks social,
political or administrative expediency in Bangladesh and that’s why the government of
India had to discontinue it.

10) Canon of Functional Efficiency: A tax policy needs to be efficient, operative and
effective so that it can generate sufficient revenue for the government in order to
ensure the economic development of the county. The system should be able to reduce
the harassment and tax avoidance. The above context clarify that the tax structure is a
part of overall economic philosophy and tax system that satisfies these basic canons can
be termed a good one.

Apart from Govt., private companies and Multinational Companies can take-up
initiatives to spread the pros and cons of paying the right amount of tax, as part of their
Corporate Social Responsibility towards the society, as well. It should be remembered
that shaping the society’s overall tax-paying behavior can never be led onto the Govt.,
Private Companies or commons, as their sole responsibility. It is a collective picture and
needs to be shaped by the collaborative effort of each and every group of people,
inclusive of individualistic and state endeavors

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