What is Taxation?

We can understand taxation as the route via which the government or the taxing authority imposes or levies taxes on all its citizens, businesses, and other entities. The system of taxation has been a mainstay of civilization since times. In simple terms, we can say that taxation is a financial obligation among the citizens of a country.

The term taxation applies charges to all types of involuntary levies, ranging from income tax to corporate tax to capital gains and estate taxes. The revenue that results from taxation is known as tax. Now that we have talked about the fundamentals of taxation, let us try and answer the question – what is taxation?

Taxation – An Overview

Taxation is a system wherein the government or any other authority mandates that citizens pay a fee. Taxes are involuntary, and as opposed to different types of payments, taxes don’t provide any direct services in return. Governments can levy taxes on physical assets, land, estates, and so forth. The concept of taxation is different from other types of payment as it does not entail consent and direct services in return. The government mandates taxation vis-à-vis explicit or implicit threat of force. Lastly, taxation is distinct from racket or extortion because legal authorities and not private actors impose it. Now that we have answered the question – what is taxation – let us dovetail into the canons of taxation. 

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Canons of Taxation

Pioneering economist Adam Smith put forth four basic rules and principles of fair tax policy in his famous book- The Wealth of Nations. We can understand the four maxims or dictums as the canons of taxation. 

  1. Equity - Equity as a canon of taxation implies that the taxes people, institutions, or organizations have to play should be proportional to their income. As such, the higher a person’s income, the more will be the tax they have to pay, and vice versa.

  2. Certainty - It refers to the idea that taxes should be clear and transparent. The notion behind ‘certainty’ is that every taxpayer should know or should have the tools to quickly find out how much tax they have to pay when they have to pay and how they have to pay their taxes. The importance of certainty is that it equips taxpayers to consider their taxes while formulating their budget. Lastly, transparency also enhances public acceptance and trust.

  3. Convenience - It implies that both the timing as well as a mode of paying the tax should be convenient for taxpayers. As such, governments and other authorities should design the taxation accounting ecosystem so that people can effortlessly make their payments.

  4. Economy - The last canon of taxation refers to the notion that the cost of collecting taxes should be minimized. The reasoning is that the money collected from taxes should be used for the welfare and benefit of the taxpayers. In other words, the government should ensure that the collection of taxes requires the least possible expenditure.

Purpose of Taxation

The primordial purpose of taxation is to ensure that the incumbent government can finance the various expenses incurred in running or governing the nation. Thus, taxes are levied to accumulate funds and consequently drive the many state-sponsored types of machinery. Hence, taxation galvanizes the development of a country and its citizens by promoting socio-economic growth, social security nets, and so on. Another purpose of taxing citizens and other entities is to reduce the consumption of unwanted goods. The government uses taxation as an instrument to reduce the consumption or proliferation of wanted items like alcohol, tobacco, and so on. Likewise, the government can also use taxes to protect local industries and manufacturers and enhance their profitability and development. Thus, we can answer the question – what is taxation and its purpose. 

In conclusion, taxation is an indispensable part of modern civilizations. They are a crucial way to determine public life. In India, both the state and the central governments have veritable importance in determining the taxes.

FAQs on Taxation

1) What are the types of taxation?

There are two types of taxation terms that we come across – direct taxation and indirect taxation. Direct taxation is the process wherein the citizen directly pays the tax to the government. Another feature of direct tax is that individual citizens cannot pass it on from one person to another. Examples of direct taxation include income tax and corporate tax. The former applies to the income earned by an individual citizen, whereas the latter applies to the profits made by companies from their businesses.

On the other hand, the tax levied on goods and services used by the taxpayer is known as indirect taxation. Contrary to direct taxation, individual citizens can shift indirect taxation from one person to another. Examples of indirect tax include GST.

2) When was GST implemented in India?

The Government of India implemented the Goods and Services Tax in India from 1st July 2017. It has replaced all forms of indirect taxes such as Value Added Tax, Excise Duty, and so forth.

3)What are the principles of taxation?

We can understand taxation principles as the set of guidelines or instructions that assist lawmakers and purveying bodies to formulate stratagems and plan their execution to devise a robust tax structure. The objective of taxation principles is to increase revenues and usher in socio-economic equality among citizens. The three principles are-

  • Distribution of Tax Burdens – It entails formulating a taxation plan that works for uplifting the poor and underprivileged sections of society. 

  • Economic Efficiency – In an ideal scenario, the economic efficiency principle implies that the taxation system of an economy should not interfere with the consumption, production, and supply chain cycles.

  • Ease of Administration and Compliance – The taxation regulating body should ensure that the taxation system should be lucid, unambiguous, cost-effective and convenient.

The importance of the taxation principles is that they help revive the economy and increase revenue generation.