Comparison of current taxation system with ideal taxation system based on cannons (principles) is given below

  • Cannon of Equity
  • Cannon of Productivity
  • Cannon of Simplicity
  • Cannon of Certainty
  • Cannon of Elasticity
  • Cannon of Economy

  1. Cannon of Equity
    Every person will have to pay the taxes to government in proportion to his "ability to pay". This means the rich should be taxed more than the poor. In accordance with this cannon, the taxation gets divided into direct (tax on income) and indirect tax (tax on consumption). Cannon of equity implies that the direct tax should always be more than the indirect tax... however the current taxation system has just the reverse ratio: 40% to 60% in terms of contribution to revenue.

  2. Cannon of Productivity
    According to this cannon, the tax should be of such a nature as to yield sufficient income to the government. The growing revenue deficit of all levels of government - central, state and local, over the last few years, is a clear indication that the current taxation system has failed miserably.

  3. Cannon of Simplicity
    According to these cannon, every tax should be simple so that the taxpayer can understand its implication without the help of experts. If the tax is complex and complicated, the taxpayer will have to seek assistance of experts to understand its implications. Besides, a complicated tax also increases the chances of corruption in the country. The current taxation system is complex beyond comprehension.

  4. Cannon of Certainty
    This means payable tax should be certain and not arbitrary. It means the tax payer should know in advance how much tax he has to pay, at what time and in what form. If the tax is "Certain", the tax official cannot exploit the taxpayer in any manner. Because of this the taxpayer as well as the government benefit, as the taxpayer can make the provision for tax in advance and the government also will be able to estimate accurately the amount of revenue, which is going to accrue to it from the tax. The current taxation system due to - a multitude of tax points, multiple tax rates and multiple exemptions and the ever-shifting governmental policies - produces a state of permanent confusion in the minds of the taxpayer. This is a clear violation of the cannon of certainty.

  5. Cannon of Elasticity
    The taxation system should provide the government with an increased income with the increase in national income of a country. The taxation system should also yield more income when the government expenditure goes up at a time of emergency or crisis. It should be possible then, to obtain more income with slight increase in the rate of taxes. By implication, elasticity also implies that the tax rate should be capable of being revised in the downward direction when the economy is confronted with recession and decline in economic activity.

    The current tax regime due to - its complexity and the already high levels of tax rates - has lost its elasticity.

  6. Cannon of Economy
    According to this cannon, the tax should be such as to bring the maximum part of the collected revenue into government treasuries. In other words, the cost of tax collection should be minimum. The current unmanageably complex and wasteful infrastructure clearly violates this cannon.