Taxation – Meaning and Definition, Objectives and Essential Features
GST Law & Practice
B.Com 6th Sem CBCS Pattern Notes
Meaning and Definition of Taxation
In simple words, it is a compulsory payment by the people. If a person defies the tax payment, he may be punished in the court of law. However, different economists tried to define taxation in a different style as stated below:
Adam Smith: “A tax is a contribution from citizens for the support of the state.”
Saligman:“A tax is compulsory payment from a person to govt. to defray the expenses incurred in the common interests of all without reference to special benefits conferred.”
Bastable: “Tax is a compulsory contribution of the wealth of a person or body of persons for the service of the public powers.”
Taussig: “The essence of a tax is distinguished from other charges by govt. in the absence of direct quid pro quo between the tax-payer and public authority.”
Dalton: “A tax is a compulsory contribution imposed by a public authority irrespective of the exact amount of service rendered to the tax-payer in return and not imposed as penalty for any legal offence.”
From these mentioned definitions, it is clear that the taxes are not a voluntary contribution by the tax-payer but it is compulsory in nature. Therefore, one can say that every payment by individuals to the state is not a tax. It is just like withdrawal from the people’s income which reduces their purchasing power. It should be noted here that tax checks production where as public expenditure may spurt the productive process. In the opinion of Dr. R.N. Bhargava, taxes are as much compulsory as other payment, like fees etc. In this context, Dalton says, “Where taxation, taken alone, may check production, public expenditure taken alone, should almost certainly increase it.” So, tax is a necessary contribution by the tax-payer to social objectives like reducing inequalities in income and wealth, securing high level of employment as well as promoting economic stability with growth.
Objectives or Aims of Taxation in a Developing Country Like India
The main objectives of taxation are as follows:
1. Raising Public Revenue: Normally, the foremost objective for the imposition of taxes, that is, to collect revenue for the govt. Today the govt. has assumed responsibilities of providing social services, promoting economic development and meeting war expenditure. All these expansions in the scope of economic activities have created necessity of greater funds to be spent by the govt. The greater the need of funds, the greater is the resort of taxation.
2. Regulation and Control: The objective of taxation is regulation and control. The govt. not only raises public revenue through taxation but also imposes restrictions on the use of certain goods and service in a way desirable and respectable for a healthy state of society. To restrict the consumption of harmful goods – excise duty on tobacco, liquor etc. is imposed to restrict the consumption of these harmful goods. On the other hand, there are import and export duties which also raise public revenue but their specific objectives are otherwise. Import duties (taxes) are levied in order to restrict imports of these goods which may harm the infant industries in the country. Similarly, luxury goods may be taxed heavily while being imported so as to divert the national funds to some other forms of production necessitated inside the country.
3. Reduction of Inequalities in Income and Wealth: Another objective of taxation is to reduce the inequality of income and wealth. One of the chief characteristics of underdeveloped countries is that there is a vast gap between the income of persons in the highest income group and of those in the lowest income group. That is why one of the objectives of taxation is to redistribute income and wealth in such a way as to ensure more just and equitable distribution.
4. Promotion of Capital Formation: Another objective of taxation is the promotion of capital formation. In underdeveloped and developing countries, one of the main objectives of taxation is to make savings more dynamic and promote capital formation. Thus, the savings can be easily directed towards production and capital formation through the assistance of taxation.
5. Business Stability and Maintaining Full Employment: Another objective of taxation is to bring about business stability and maintain full employment conditions. Low rate taxation during a business depression shall accelerate more income to the people and help in raising demand and, thus, revive business activity. On the contrary, high rates of taxes and additional taxes may be useful to check inflationary pressure on prices.
6. Political Objectives: In democratic countries taxation is used as weapon for attaining political objectives. For instance, lower and middle-class voters may be attracted by imposing high taxes on rich people and luxury goods and nominal or no taxes on goods consumed by poor and middle-class people. Thus, it also fulfils the need of political objective in a country.
7. Increase in National Income: Another objective of taxation is to increase the national income. Tax is the main source of the govt. income. This income is used for productive purposes and thereby overall production is increased. This increase in production leads to increase in national income of the country along with increase in per capital income.
8. Restriction on Unnecessary Consumption: Another objective of taxation is to restrict the unnecessary consumption particularly of harmful commodities, such as wine, cigarettes, biris, bhang etc. When heavy tax is imposed on such commodities, the consumption of such commodities are automatically reduced. According to A.P. Lerner, “Individuals should be taxed only to the extent to make the tax-payer poorer.”
9. Proper Standard: Another objective of taxation is the maintenance of proper standard. According to A.P. Lerner, “Taxes should not be imposed simply because the govt. needs money. Economic transaction should be taxed only when it is thought desirable to discourage these transactions. Individuals should be taxed only when it is desirable to make the tax-payer poorer.”
Characteristics of an Ideal Tax System or Requisites of a Sound Tax System
A good or ideal tax system is one which fulfils all the canons of taxation, which is helpful to provide sufficient revenue to the government for meeting the expenditure and at the same time offer minimum inconvenience to the tax-payer. According to Edmund Burke, “It is difficult to tax and to please as it is to love and to be wise.” That we mean by a good or deal tax system is simply the predominance of good taxes; taxes which fulfils most the canons taxation. The following characteristics should be there in order to be called a good or deal tax system:
1. Tax Ratio: It is difficult to determine the tax ratios by a fixed norm. The opportunity cost of raising more revenue, the benefit to be derived from extra public spending and cost of servicing public sector debt all changes over time and differ across countries. Decisions on public spending, borrowing the revenue are highly interrelated, if they are to set, they must be set jointly.
2. Efficiency and Growth: It is often difficult to design a tax structure that will satisfy the aims of efficiency as well as growth. In order to raise higher revenue, there is need to change the base or rate of some taxes at least. In that case firms and individuals will bring about a change in the allocation of resources from heavily taxed industries to lightly taxed one. In the event of market prices reasonable reflecting social costs and benefits, the above tax change will require a tradeoff between revenue and efficiency. When market price do not reflect social costs and benefits, taxes can be utilized to improve allocation of resources.
3. Equity in Taxation: Equity is another issue that is associated with any tax reform. There are two types of equity viz. horizontal equity and vertical equity. The former is concerned with the treatment of person with similar incomes, while the latter is more concerned with reduction in income inequality. Tax system of developing countries fails miserably in terms of horizontal equity. In the case of vertical tax equity too, the record is no better and it is so in spite of progressive tax structure because it is not fully applied. Another factor is large scale tax evasion.
4. Taxes should observe all the Canons: The taxes should be so imposed that they are equitable, convenient to pay, certain, economic, productive, elastic and simple. The essence of the argument is that majority of the taxes should observe most of the canons.
5. Taxes should ensure maximum Social Advantage: Another major characteristic of a good tax system is that it should ensure maximum social advantage. The imposition of taxes should be on the basis of this fundamental principle of public finance. It must ensure maximum social advantage or least aggregate sacrifice.
6. Balanced Tax System: Another major pre-requisite of good tax system is that it should be balanced. It means that tax system is simply that it should exist not one kind of taxes but all kinds of them in a proper balance. For example, both direct and indirect tax systems have their advantages and disadvantages. But it is required of a good tax system to have both kinds of taxes in a proper balance.
7. Many Dimensions of Tax System: A tax has many dimensions. We should look into its volume, composition, rates, coverage, timings of collection, mode of collection and so on in order to see its effects in their totality. Each system will have its own merits and demerits in terms of its social and economic effects. Thus, in general, it is very difficult to evolve a tax system which is the best or ideal in every respect.
8. Universal Application of Taxes: Another main characteristic of a good tax system is that it should ensure universal and uniform application of taxes to each individual of the society without any discrimination.
9. Desirable Effects on Production and Distribution: A good tax system is one which has desirable effects on production and distribution. It should ensure a rapid economic development of the country. A good tax system always promotes production, encourages people to work, save and invest, and increases national income and its equitable distribution.
10. Source of Public Revenue: To consider a tax system ideal, it must have the quality to provide public revenue. Tax is an important part of the total revenue of the budget. It is a source of public revenue and hence it should provide necessary revenue to the government.
11. Freedom from Harassment: A good or deal tax system recognizes that tax-payer has some basic rights. He is prepared to pay his taxes but would not like to undergo any harassment. With this in view, tax laws should be simple in language and the tax liability should be easily determinable with certainty.