Define Tax:

According to Hugh Dalton, "a tax is a compulsory contribution imposed by a public

authority, irrespective of the exact amount of service rendered to the taxpayer in return,
and not imposed as penalty for any legal offence."
What are the essentials of Tax

A tax is a compulsory contribution of a person or entity to the state as per the rules.
The tax payer does not receive direct and or special benefit in return.
It is spent by the government for the common interest and benefit of the people.
It is paid only by those persons and entities who earns income exceeding a certain
specified limit.

What are the Different Types of Tax with Examples

Taxes may be categorized into different as their nature as direct taxes, indirect taxes,
progressive taxes, regressive taxes etc.
Direct Tax
A direct tax is the one, which is paid by the person or entity on whom it is legally imposed. It
is collected from the persons or entities on the income they have earned exceeding a certain
specified limit. Tax is generally calculated at a certain percentage on the income. Income tax,
corporate tax, land revenue tax etc. are the examples of direct tax.
Indirect Tax
An indirect tax is the one, which is imposed to one person or entity but paid partly or fully by
others. It is transferable to others. The tax is collected from customers by including it in the
price of the goods or services they have purchased. The producers collect such a tax from
wholesalers the wholesalers from retailers and the retailers from the final consumers. Excise
duty, custom duty, VAT etc. are some of the examples of indirect tax.
Personal income Tax
Personal income tax refers to the tax imposed on individuals or families who earn income
exceeding a certain specified limit subject to change as per the provisions made in financial
rules and regulations.
Corporate Tax
Corporate tax is the tax imposed on the incomes of a business entity. It occupies the most
part of the government revenue collected from taxes. Corporate tax rates are generally
applied in flat system with high rate of large undertakings and low rates for smaller ones.
The small and large undertakings are categorizes as per the size of the activities.
Excise duty
Excise duty is the tax levied on luxurious products. It is intended to discourage the the
consumption of harmful products on one side and to collect government revenue in
considerable extent on the other side.

Custom Duty
Custom duty is the tax charged on the goods dealt in the foreign trade especially on the
imported goods to encourage and promote export and to protect national industries.
Government simply gives exemption of this tax on export trade and imposes on import trade.
Custom duty may be export duty or import duty as its nature and imposed to the trading
goods.
Land revenue Tax
Land revenue tax is the one, which is imposed to the landlords on the revenue generated
from land especially while selling or purchasing land.
Value Added Tax (VAT)
Value added tax is the tax levied on value added on the price of the product at each stage of
production, and or distribution activities. Value added is the difference between sales values
and purchase value or the conversion cost plus profit. Conversion cost means the expenses
on rent, depreciation, maintenance, insurance, salary etc. It is imposed on the goods at
import, production and selling stages.
What are the objectives of Tax
The concept of tax was initiated with a view to generate government revenue in its very
beginning stage. In course of time it has been utilized for various purposes.

To raise government revenue for development and welfare programmes in the

country.
To maintain economic equalities by imposing tax to the income earners and
improving the economic condition of the general people.
To encourage the production and distribution of the products of basic needs and
discourage the production and harmful ones.
To discourage import trade and protect the national industries.

What are the Importance of Tax

Tax is a major source of government revenue and its contributes for the overall
development and prosperity of a country.
Raising government revenue in terms of income tax, custom duty, excise duty,
entertainment tax, VAT, land revenue tax etc. from various sectors in order to initiate
development and welfare programmes.
Maintaining economic stability by reducing economic inequalities by means of
equitable distribution of wealth by way of imposing tax to the income earners and
improving the economic condition of the general people.
Regulating the economic sectors into right direction by encouraging the production
and distribution of useful goods and discouraging the harmful products by imposing
high tax rate on them.
Building and strengthening the national economy by encouraging and protecting
national industries and promoting export trade.
Reducing regional economic disparity by encouraging the entrepreneurs to establish
industries in remote and backward regions by giving tax exemptions, rebates and
concessions etc.

What are Canons of Taxation ?

Canons of Taxation are the main basic principles (i.e. rules) set to build a 'Good Tax
System'.
Canons of Taxation were first originally laid down by economist Adam Smith in his famous
book "The Wealth of Nations".
In this book, Adam smith only gave four canons of taxation. These original four canons are
now known as the "Original or Main Canons of Taxation".
Adam Smith's Four Main Canons of Taxation
A good tax system is one which is designed on the basis of an appropriate set of principles
(rules). The tax system should strike a balance between the interest of the taxpayer and that
of tax authorities. Adam Smith was the first economist to develop a list of Canons of
Taxation. These canons are still regarded as characteristics or features of a good tax system.
Adam Smith gave following four important canons of taxation.
1. Canon of Equity
The principle aims at providing economic and social justice to the people. According to this
principle, every person should pay to the government depending upon his ability to pay. The
rich class people should pay higher taxes to the government, because without the protection
of the government authorities (Police, Defence, etc.) they could not have earned and enjoyed
their income. Adam Smith argued that the taxes should be proportional to income,
i.e., citizens should pay the taxes in proportion to the revenue which they respectively enjoy
under the protection of the state.
2. Canon of Certainty
According to Adam Smith, the tax which an individual has to pay should be certain, not
arbitrary. The tax payer should know in advance how much tax he has to pay, at what time he
has to pay the tax, and in what form the tax is to be paid to the government. In other words,
every tax should satisfy the canon of certainty. At the same time a good tax system also
ensures that the government is also certain about the amount that will be collected by way of
tax.
3. Canon of Convenience
The mode and timing of tax payment should be as far as possible, convenient to the tax
payers. For example, land revenue is collected at time of harvest income tax is deducted at
source. Convenient tax system will encourage people to pay tax and will increase tax revenue.
4. Canon of Economy
This principle states that there should be economy in tax administration. The cost of tax
collection should be lower than the amount of tax collected. It may not serve any purpose, if
the taxes imposed are widespread but are difficult to administer. Therefore, it would make
no sense to impose certain taxes, if it is difficult to administer.

Additional Canons of Taxation

Activities and functions of the government have increased significantly since Adam Smith's
time. Government are expected to maintain economic stability, full employment, reduce
income inequality & promote growth and development. Tax system should be such that it
meets the requirements of growing state activities.
Accordingly, modern economists gave following additional canons of taxation.
5. Canon of Productivity
It is also known as the canon of fiscal adequacy. According to this principle, the tax system
should be able to yield enough revenue for the treasury and the government should have no
need to resort to deficit financing. This is a good principle to follow in a developing economy.
6. Canon of Elasticity
According to this canon, every tax imposed by the government should be elastic in nature. In
other words, the income from tax should be capable of increasing or decreasing according to
the requirement of the country. For example, if the government needs more income at time
of crisis, the tax should be capable of yielding more income through increase in its rate.
7. Canon of Flexibility
It should be easily possible for the authorities to revise the tax structure both with respect to
its coverage and rates, to suit the changing requirements of the economy. With changing
time and conditions the tax system needs to be changed without much difficulty. The tax
system must be flexible and not rigid.
8. Canon of Simplicity
The tax system should not be complicated. That makes it difficult to understand and
administer and results in problems of interpretation and disputes. In India, the efforts of the
government in recent years have been to make the system simple.
9. Canon of Diversity
This principle states that the government should collect taxes from different sources rather
than concentrating on a single source of tax. It is not advisable for the government to depend
upon a single source of tax, it may result in inequity to the certain section of the society;
uncertainty for the government to raise funds. If the tax revenue comes from diversified
source, then any reduction in tax revenue on account of any one cause is bound to be small.
Requirement of a Good Tax Structure / System
The tax structure is a part of economic organisation of a society and therefore fit in its overall
economic environment. No tax system that does not satisfy these basic condition can be
termed a good one.
However, the state should pursue mainly following principles in structuring its tax system :The primary aim of the tax should be to raise revenue for public services.
People should be asked to pay taxes according to their ability to pay and assessment of their
taxable capacity should be made primarily on the basis of income and property.

Tax should not be discriminatory in any aspect between individuals and also between various
groups.
Taxation System in India
India has a well-developed tax structure with clearly demarcated authority between Central
and State Governments and local bodies.
Central Government levies taxes on income (except tax on agricultural income, which the
State Governments can levy), customs duties, central excise and service tax.
Value Added Tax (VAT), stamp duty, state excise, land revenue and profession tax are levied
by the State Governments.
Local bodies are empowered to levy tax on properties, octroi and for utilities like water
supply, drainage etc.
Indian taxation system has undergone tremendous reforms during the last decade. The tax
rates have been rationalized and tax laws have been simplified resulting in better
compliance, ease of tax payment and better enforcement. The process of rationalization of
tax administration is ongoing in India.
Important Direct and Indirect Taxes
Direct Taxes
Income Tax
Income Tax is paid by an individual based on his/her taxable income in a given financial
year. Under the Income Tax Act, the term individual also includes Hindu Undivided
Families (HUFs), Co-operative Societies, Trusts and any artificial judicial person. Taxable
income refers to total income minus applicable deductions and exemptions.
Tax is payable if the taxable is above the minimum taxable limit and is paid as per the
differing rates announced for each tax slab for the financial year.
Corporation Tax
Corporation Tax is paid by Companies and Businesses operating in India on the income
earned worldwide in a given financial year. The rates of taxation vary based on whether the
company is incorporated in India or abroad.

Wealth Tax
Wealth tax is applicable on individuals, HUFs or companies on the value of their assets in a
given financial year on the date of valuation. It is taxed at the rate of 1% of the net wealth of
any assesse exceeding Rs 30,00,000.
Net wealth here includes, unproductive assets like cash in hand above Rs 50,000, second
residential property not rented out, cars, gold jewellery or bullion, boats, yachts, aircrafts or
urban land. It does not include productive assets like commercial property, stocks, bonds,
fixed deposits, mutual funds etc.

Capital Gains Tax

The profits made on sale of property are taxable under Capital Gains Tax. Property here
includes stocks, bonds, residential property, precious metals etc. It is taxed at two different
rates based on how long the property was owned by the taxpayer Short Term Capital Gains
Tax and Long Term Capital Gains Tax. This deciding period of ownership varies greatly for
different classes of property.
Indirect Taxes
Sales Tax
Sales Tax is charged on the sale of movable goods. It is collected by the Central Government
in case of inter-state sales (Central Sales Tax or CST) and by the State Government for intrastate sales (Value Added Tax or VAT). The rates of taxation vary depending on the product
type.
Service Tax
Service tax is applicable on all services provided in India except a specified negative list of
services that are exempt. It is paid by the service provider to the government who in turn
collects it from the end user by the service provider at the time of provision of such service.
Excise Duty
Excise duty is applicable on the manufacture of goods sold in India. Once goods are
manufactured, it is originally paid by the manufacturer directly to the Central Government.
When the goods change hands from the manufacturer to the buyer, this tax is bundled by the
manufacturer along with the cost of goods and passed on to the buyer.
Comparison Chart
BASIS
FOR
COMPARISON
Meaning

Burden
Types

DIRECT TAX

INDIRECT TAX

Direct tax is referred to as the tax,

levied on person's income and wealth
and is paid directly to the
government.
The person on whom it is levied
bears its burden.
Wealth Tax, Income Tax, Property
Tax, Corporate Tax, Import and
Export Duties.

Indirect Tax is referred to as the tax,

levied on a person who consumes the
goods and services and is paid
indirectly to the government.
The burden of tax can be shifted to
another person.
Central Sales tax, VAT (Value Added
Tax), Service Tax, STT (Security
Transaction Tax), Excise Duty, Custom
Duty.
Tax evasion is hardly possible because
it is included in the price of the goods
and services.
Indirect taxes promotes the inflation.

Evasion

Tax evasion is possible.

Inflation

Direct tax helps in reducing the

inflation.
Persons, i.e. Individual, HUF (Hindu
Undivided Family), Company, Firm
etc.
Progressive

Levied on

Nature

Consumers of goods and services.

Regressive