TAXATION

CONTENTS
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-

1.) taxes,
2.) commercial revenues in the form of prices of
goods and services supplied by public enterprises,
3.) administrative revenues in the form of-
 fees, fines, etc and gifts and grants.

4.) escheat
 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
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
  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
1.) Canon of Equality
2.) Canon of Certainty
3.) Canon of Convenience
4.) 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-

1.) form,
2.) nature,
3.) aim and
4.) method of taxation.
the most common and traditional classification is to
classify into direct and indirect taxes.
1.) Direct Tax
2.) 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 of 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