What is Fiscal Policy, Canons of Taxation

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Type of Taxes, Taxation Management >>

Taxation Management FIN 623

MODULE 1

LESSON 1.2

AN OVERVIEW OF TAXATION

What is Fiscal Policy?

Fiscal policy is a discipline that deals with arrangements which are adopted by government to collect the

revenue and make the expenditures so that social and economic stability could be attained / maintained.

Objectives of Fiscal Policy

Economic Development

Raising level of employment (Achieving full employment level)

Influencing consumption patterns

Price stability

Redistribution of income

Removal of deficit in Balance of Payments

Instruments of Fiscal Policy

Government Expenditures

Taxes

Deficit Financing

Subsidies

Transfer Payments--like Unemployment Allowances etc.

Sources for Revenue Generation for State

Taxes, Tariffs

Internal & External Borrowing

Penalties & Fines

Aids & Grants

Canons of Taxation:

Simplicity

This principle implies that taxation system should be plain, and easily understandable by the tax payer.

Convenience

The convenience of tax payer as well as tax collector must be the bottom line of any taxation system. The

time of payment of tax, mode of collection of tax, should be convenient for the tax payers.

Certainty

This cannon suggest that the amount of payment should be certain and there should not be any

arbitrariness or ambiguity with respect to the amount of tax to be paid by the tax payer.

Judicious

The taxation system should be based on the principles of equity, fair play, and all known principles of

natural justice.

Capacity to Pay

This principle suggests that taxation system must be based keeping in view the capacity to sacrifice by the

person on whom the tax is levied, those who have more income should pay taxes at high rates/

proportions, where as those who have low income, they should pay taxes at lower rates or proportion.

Benefit principle

This principle suggests that taxes should be levied according to the benefits derived by the person from the

state. Since more benefits are derived by lower income groups, hence according to this principle, those who

derive more income but enjoy less benefits from the state should be taxed at the lower rates and those

persons who derives less income but more benefits from State should be taxed at high rates.

Business Friendly

According to this principle, the taxation policy should be such as to boost business atmosphere and not

discouraging the investment environment.

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