Corporate Taxation

Dalton defined tax as �a compulsory contribution imposed by the public authority, irrespective of the exact amount of service rendered to the taxpayer, in return for which no specific and direct quid pro quo is rendered to the payer’. In accordance to this definition, it is clear that paying tax is a compulsory contribution to which the state is entitled to. Even if the benefit in return to the tax paid is not proportional to the taxpayer, the taxpayer must pay taxes or face the consequences of avoiding taxes. Prof. Seligman also defined tax as �a compulsory contribution from the person to the State to defray the expenditure incurred in the common interest of all without any reference to the special benefits conferred’. As it can also be concluded from the statement, tax liability must be incurred by a taxpayer in order to fund the operations performed by the state, regardless of the service the taxpayer might or might not enjoy.

The primary reason for the imposition of tax is to gather revenue for the functioning of Government. Services such as road maintenance, schools, hospitals, etc. require funds which are collected via taxation. These are the most basic operations of government which requires tax funds. A few other complicated reasons for the collection of tax can be to fund wars or encourage a rapid economic development вЂ" which all requires funds. Tax policy can also be very useful and effective to attain price stability, control business boom and depressions and to maintain full employment. Tax is also used to diminish inequalities in society via income and wealth taxation, where those with high income and wealth are affected more than those with lower income and wealth.

It is now understood that tax is an imposition upon people, a burden which they are compelled to carry. The debate lies in the manner in which this burden is shared вЂ" what would be a fair manner in which this burden can be shared among the taxpayers? The structure of an efficient tax system is not a constant throughout the world. The basis of tax structure primarily depends on the nature and amount of public expenditure as well as the public’s view of the role of the government. It is also dependent upon the state of a country, i.e., in case of developing countries the state plays a dynamic role and in case of advanced countries, it plays an active role. During the 18th century, an economist named Adam Smith laid down four canons or principles of taxation. These principles have been seen as a guideline for tax structure through time, and should also be included in any sound tax structure. In order to entertain the notion that the principles set out by Adam Smith so long ago are still relevant in modern tax structure, it is important to analyse these principles or canons first. These canons are as follows:

• Canon of Ability:

Smith defined the first canon as the ability to pay tax. According to Smith, all citizens must pay tax �as nearly as possible in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State’. Smith’s statement would imply that the richer a person, the more is his ability to pay towards the expense of government. It also extends to the idea that the ability to pay tax would be based on the income or expenditure or wealth of a person. Conversely, poor should be taxed less as this principle is based on the principle of justice. This is considered to be the most important principle of taxation which has been embraced by even the most modern economist. However, one area where Smith was not clear was the principle of ability. His implication that �as nearly as possible in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State’ would give rise to the contrast between principal of ability and principle of benefits.

• Canon of Certainty:

The second canon of taxation defined by Smith is the amount to be paid, the time and the method of payment. With reference to Quotation 1, Appendix, the amount, time and method of tax payment should be clear to all tax payers so that the taxpayer can adjust his income and expenditure accordingly. Similarly, the state must also be clear on the amount and time upon which the levied tax is to be received. This canon is meant to safeguard the taxpayers from any exploitation by the tax-collector or the state. The absence of certainty in taxation provides the opportunity of abuse on the taxpayer and the corruption of tax-collector. A taxpayer should therefore be knowledgeable about the amount, time and method of tax as well as rate of tax to make investment decisions. As it has been mentioned, certainty is not only from the point of view of the taxpayer, it is also applicable to the state. This canon also implies that taxation should be systematic and not arbitrary.

• Canon of Convenience:

The third canon of taxation refers to the convenience of the taxpayer to pay their due tax. Smith argues that since tax imposes itself as a burden, it should be paid at such a time and in such a manner where the taxpayer would feel the most minimal amount of inconvenience. Smith also illustrated a few examples of how to impose and collect tax with accordance to this principle or canon. With reference to Quotation 2, Appendix, Smith referred to tax payments in the form of VAT on goods purchased by taxpayers, and PAYE method for employees (Pay As You Earn). It must also be noted that the canon of convenience is also applicable to the government.

• Canon of Economy:

The final canon of taxation refers to the minimisation of the collection of taxes. Smith argued that the cost of tax collection should always be significantly lower that the revenue of tax collected. He also argued that the government should not levy taxes in instances when the cost of collection is a significant amount of the tax revenue generated. It would appear to be logical as the concept of taxation is to generate as much funds for the operation of government. If the costs of collecting those funds are so high that it would cut the revenue generated, it would adversely affect the government.

Even though these four canons of taxation are revered to be crucial in determining a sound tax structure, after careful consideration, it can be argued that these are simply directions for the administration