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TAXATION
CONTENTS
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Public Finance
Public Revenue
Taxation
Objectives of taxation
Canons of taxation
Classification of taxation
Individual Income tax rates in India
Exemptions and Deductions from tax
Conclusion
References
 What is Public Finance?
According to Dalton,’ Public finance is the branch of knowledge
which is concerned with the income and expenditure of public
authorities and with the adjustment of one to another.’ It deals
with the study of revenue and expenditure of the government
at the centre, state and local bodies.
The public authorities have to perform various functions such
as maintenance of law an order, provision of defence,
production for bringing in economic development. The
performance of these functions require large amount of funds
which is raised through taxes, fees, fines, commercial
revenues and loans.
 Public Revenue
This is one of the branches of public finance. It
deals with the various sources from which the state
might derive its income. These sources include
incomes from taxes, commercial revenues in the
form of prices of goods and services supplied by
public enterprises, administrative revenues in the
form of fees, fines etc and gifts and grants.
Difference between Public revenue and
Public receipts
Public revenue includes that income which is not
subject to repayment by the government. Public
receipts include all the income of the government
including public borrowing and issue of new
currency. In this way public revenue is a part of
public receipts.
Public Receipts = Public revenue + Public
borrowing + issue of new currency
Taxation
The most important source of revenue of the
government is taxes. The act of levying taxes is
called taxation. A tax is a compulsory charge or
payment imposed by government on individuals or
corporations. The persons who are taxed have to
pay the taxes irrespective of any corresponding
return from the goods or services by the
government. The taxes may be imposed on the
income and wealth of persons or corporations and
the rate of taxes may vary.
 Objectives of Taxes
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Raising Revenue
Regulation of Consumption and Production
Encouraging Domestic Industries
Stimulating Investment
Reducing Income Inequalities
Promoting Economic Growth
Development of Backward Regions
Ensuring Price Stability
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Canons of Taxation
A good tax system should adhere to certain
principles which become its characteristics. A
good tax system is therefore based on some
principles. Adam Smith has formulated four
important principles of taxation. A few more have
been suggested by various other economists.
These principles which a good tax system should
follow are called canons of taxation.
Adam Smith’s four canons of
taxation
 Canon
of Equality
 Canon of Certainty
 Canon of Convenience
 Canon of Economy
 Canon of Equality
This states that persons should be taxed according to their
ability to pay taxes. That is why this principle is also known as
the canon of ability. Equality does not mean equal amount of
tax, but equality in tax burden. Canon of equality implies a
progressive tax system.
 Canon of Certainty
According to this canon, the tax which each individual is
required to pay should be certain and not arbitrary. The time
of payment, the manner of payment and the amount to be
paid should be clear to every tax payer. The application of
this principle is beneficial both to the government as well as
to the tax payer.
 Canon of Convenience
According to this canon, the mode and timings of tax
payment should be convenient to the tax payer. It means that
the taxes should be imposed in such a manner and at the
time which is most convenient for the tax payer. For example,
government of India collects the income tax at the time when
they receive their salaries. So this principle is also known as
‘the pay as you earn method’.
 Canon of Economy
Every tax has a cost of collection. The canon of economy
implies that the cost of tax collection should be minimum.
Classification of Taxes
Taxes can be classified into various types
on the basis of form,nature,aim and method
of taxation. the most common and traditional
classification is to classify into direct and
indirect taxes.
 Direct
Tax
 Indirect tax
 Direct taxes
A direct tax is that tax whose burden is borne by the same
person on whom it is levied. The ultimate burden of
taxation falls on the person on whom the tax is levied. It is
based on the income and property of a person. Thus
income tax, corporation tax on company’s profits, property
tax, capital gains tax, wealth tax etc are examples of direct
taxes.
 Indirect taxes
An indirect tax is that tax which is initially paid by one
individual, but the burden of which is passed over to some
other individual who ultimately bears it. It is levied on the
expenditure of a person. Excise duty, sales tax, custom
duties etc are examples of indirect taxes.
On the basis of degree of progression of tax,
it may be classified into:
 Proportional
tax
 Progressive tax
 Regressive tax
 Degressive tax
 Proportional tax
A tax is called proportional when the rate of taxation remains
constant as the income of the tax payer increases. In this
system all incomes are taxed at a single uniform rate,
irrespective of whether tax payer’s income is high or low. The
tax liability increases in absolute terms, but the proportion of
income taxed remains the same.
 Progressive tax
When the rate of taxation increases as the tax payer’s income
increases, it is called a progressive tax. In this system, the
rate of tax goes on increasing with every increase in income.
 Regressive taxation
A regressive tax is one in which the rate of taxation decreases
as the tax payer’s income increases. Lower income is taxed at
a higher rate, whereas higher income is taxed at a lower rate.
However absolute tax liability may increase.
 Degressive taxation
A tax is called degressive when the rate of progression in
taxation does not increase in the same proportion as the
increase in income. In this case, the rate of tax increases upto
a certain limit, after that a uniform rate is charged. Thus
degressive tax is a combination of progressive and
proportional taxation. This type of taxation is often used in
case of income tax. This is the case of income tax in India as
well.
Taxable Capacity
TAXABLE CAPACITY IS THE MAXIMUM
AMOUNT WHICH THE CITIZEN OF A
COUNTRY CAN CONTRIBUTE TOWARDS
THE EXPENSES THE PUBLIC AUTHORITIES
OF WITHOUT HAVING UNDERGO AN
UNBEARABLE STRAIN.
TAXABLE CAPACITY IS
NORMALLY USED INTO TWO
SENSES;
(A)THE ABSOLUTE TAXABLE
CAPACITY AND
(B) THE RELATIVE TAXABLE
CAPACITY.
A) THE ABSOLUTE TAXABLE
CAPACITY
THE ABSOLUTE TAXABLE CAPACITY
INDICATES THE AMOUNT OF MONEY OR
THE PROPORTION OF NATIONAL INCOME
THAT CAN BE TAKEN AWAY BY THE
GOVERNMENT FROM PEOPLE IN THE
FORM OF TAXES WITHOUT PRODUCING
UNFAVORABLE EFFECTS. THE CONCEPT
OF ABSOLUTE TAXABLE CAPACITY IS NOT
TO BE ASSUMED AS A CONSTANT ENTITY.
(B)THE RELATIVE TAXABLE
CAPACITY
IN THE RELATIVE SENSE, THE REFERENCE IS TO
THE PROPORTION IN THE TWO OR MORE
NATIONS OR GROUPS OF PERSONS OR STATES IN
A FEDERATION CONTRIBUTE TOWARDS THE
COMMON EXPENDITURE THROUGH TAXATION.
THE RELATIVE TAXABLE CAPACITY REFERS TO
THE PROPORTION IN WHICH TWO OR MORE
COMMUNITY CAN CONTRIBUTE IN THE FORM OF
TAXES IN ORDER TO MEET SOME COMMON
EXPENDITURE. IN OTHER WORDS, RELATIVE
TAXABLE CAPACITY OF THE COMMUNITY TO
CONTRIBUTE TO SOME COMMON EXPENDITURE
IN RELATIONS TO THE CAPACITIES OF OTHER
COMMUNITIES.
CONCLUSION
IT IS TRUE THAT WE CANNOT MEASURE
THE ABSOLUTE TAXABLE CAPACITY OF A
COUNTRY WITH ANY DEGREE OF
ACCURACY. BUT IT WOULD BE WRONG TO
DENY THE EXISTENCE OF THE CONCEPT
OF ABSOLUTE TAXABLE CAPACITY IN
PUBLIC FINANCE. THERE ARE A NUMBER
OF CONCEPTS IN ECONOMICS WHICH
CANNOT BE MEASURED ACCURATELY AND
YET THEY PLAY AN IMPORTANT ROLE IN
THE FORMULATION OF ECONOMIC LAWS.
CONCEPT OF ABSOLUTE TAXABLE
CAPACITY IS ONE OF SUCH CONCEPTS
FACTORS DETERMINE
TAXABLE CAPACITY
SIZE OF THE NATIONAL
INCOME
THE TAXABLE CAPACITY OF A COUNTRY IS
PRIMARILY DEPENDS ON ITS SIZE OF A
NATIONAL INCOME WHICH IN TURN ON THE
PROPER USE OF NATURAL RESOURCES,
SKILL, TECHNOLOGY, INVESTMENT
PATTERN.
SIZE AND RATE OF GROWTH
OF POPULATION
SIZE AND RATE OF POPULATION AFFECTS
THE TAXABLE CAPACITY TO A GREAT
EXTENT. THE LARGER THE POPULATION
THE LOWER THE TAXABLE CAPACITY.
COUNTRIES LIKE INDIA
AND CHINA HAVE A LOWER TAXABLE
CAPACITY BECAUSE OF HIGH
POPULATION.
DISTRIBUTION OF INCOME
AND WEALTH
THE DISTRIBUTION OF INCOME AND
WEALTH ALSO INFLUENCE THE TAXABLE
CAPACITY OF THE PEOPLE. IF THE
WEALTH AND INCOME IS UNEQUALLY
DISTRIBUTED, TAXABLE CAPACITY IS HIGH
BECAUSE IT WILL BE EASY FOR THE
GOVERNMENT TO RAISE THE BULK OF
REVENUE
STABILITY AND GROWTH OF
INCOME
TAXABLE CAPACITY OF THE COUNTRY
WILL BE LOWER IF THERE ARE ECONOMIC
FLUCTUATIONS WITH SERIOUS UPS AND
DOWNS ESPECIALLY DURING THE PERIOD
OF DEPRESSION.
PATTERN OF TAXATION
TAXABLE CAPACITY DEPENDS UPON THE
PATTERN AND METHOD OF TAXATION. IF
THE TAX SYSTEM IS WELL PLANNED AND
BROAD BASED, IT WILL BRING MORE
REVENUE, SIMILARLY IF IT OBSERVES THE
CANONS OF ECONOMY AND
CONVENIENCE, TAXABLE CAPACITY WILL
CERTAINLY BE GREATER.
· PURPOSE OF TAXATION
THE PURPOSE OF TAXATION HAS TO DO
MUCH WITH THE EXTENT OF TAXABLE
CAPACITY.
NATURE OF PUBLIC
EXPENDITURE
THE NATURE OF PUBLIC EXPENDITURE
ALSO DETERMINES THE EXTENTS OF
TAXABLE CAPACITY. WHEN IT IS USED ON
PRODUCTIVE PROJECTS, IT INCREASES
THE WEALTH OF THE COUNTRY WHICH IN
TURN INCREASES THE TAXABLE
CAPACITY.
PSYCHOLOGY OF TAXPAYER
PSYCHOLOGY OF TAXPAYER PLAYS A
VITAL ROLE TO DETERMINE THE
TAXABLE CAPACITY OF A COUNTRY.
INCASE THE PEOPLE ARE PSYCHOLOGY
DEPRESSED; THE TAXABLE
CAPACITY WILL BE REDUCED
AUTOMATICALLY.
Thank you