Tax - Attributes, Classification & Principle of Good Taxation

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  • A tax is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state to fund various public expenditures
  • Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent
Two aspects of taxes
  1. A tax is a compulsory payment and no one can refuse to-pay it.
  2. Proceeds from taxes are used for common benefits or general purposes of the State. In other words, there is no direct quid pro quo involved in the payment of a tax.
Attributes of Tax
Tax Base
(Those people / entity liable to pay tax.
Ex: Person A: 1,00,00,000 incomes – 10% tax = 10,00,000, Person B: 60,00,000 incomes – 10% tax = 6,00,000. Total Tax Base is 16,00,000).
  • Tax base is defined as the income or asset balance used to calculate a tax liability, and the tax liability formula is tax base multiplied by tax rate.
  • The rate of tax imposed varies depending on the type of tax and the tax base total.
  • Eg. Base of excise duty is production of commodities.
Impact and Incidence of Taxation
(Incidence - where govt is levied, Impact – who feeling the Burdon)
[Ex: Direct tax - Impact & Incident same place (Income Tax on Person – Individual pay)
Indirect Tax - Impact & Incident different place (GST on Goods/Company – People pay)]
  • Incidence is the point where tax looks being imposed.
  • It is the event of tax imposition.
  • Impact is the point where the tax makes its effect felt.
  • It is the after effect of tax imposition.
Classification of Taxation
1.Proportional tax:
(Whatever price of Good, Same % of tax for all)
  • In case of proportional tax, the same rate of the tax is charged, whatever be the magnitude of the base on which it is levied.
  • For instance, if rate of income tax is 25 per cent whatever the size of income of a person, it will then be a proportional income tax. Likewise, if rate of wealth tax is 5 per cent, it will be proportional wealth tax.
  • Thus, in case of proportional tax it is the rate which is fixed and not the absolute amount of the tax.
2. Progressive tax
(More income More Tax, less income Less tax OR Rich paying more tax and poor paying less tax – Help in Redistribution of Income (Article (39))
  • In case of a progressive tax, rate of the tax increases as the amount of the tax base (income, wealth or any other object) increases.
  • The principle underlying a progressive tax is that greater the tax base, the higher the tax rate.
  • In India income tax, an important direct tax levied by the Central Government, is progressive.
  • Under progressive income tax, the richer person pays not only absolutely more tax but also a higher rate of the tax. Thus, the burden of progressive tax falls more heavily on the richer persons as compared to proportional income tax.
3. Regressive tax
  • A regressive tax is the opposite of a progressive tax.
  • In case of a regressive income tax, the rate is lowered as the income rises.
  • Thus, under regressive tax system, the burden of the tax is relatively more on the poor than on the rich.
  • A regressive tax is therefore inequitable and no civilized Government in the world today will levy such a tax.
Principle of Good Taxation System
(Canons of Taxation)
  1. Fairness
    • Horizontal equity.
    • Vertical equity.
  2. Efficiency
    • Efficiency of a tax system is its potential to affect or interfere the efficiency of the economy.
    • A good tax system raises revenue with the least cost on the taxpayers and least interference on the allocation of resources in the economy.
  3. Administrative Simplicity
    • It includes factors like computation, filing, collection, etc. of the taxes that all should be as simple as possible.
    • Simplicity checks tax evasion too.
  4. Flexibility
    • A good tax system has the scope of desirable modifications in it if there is any such need.
  5. Transparency
    • How much tax taxpayers are actually paying and what are they getting against it in the form of the public services should be ascertainable, i.e., the transparency factor.

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