Introduction To meet the increasing public expenditure public authorities raises resources through public revenue.

Public revenue, an indispensable organ of public finance operation, includes all income and receipts of the government through various sources. Different means of revenue to the government are called sources of public revenue. Sources of public revenue can be broadly divided into two categories such as; (i) earned revenue and (i) unearned revenue. Earned revenue is the kind of revenue which is received from certain assured sources kept under the complete disposal of governmental ownership. It includes public domain like rent, royalties, sales of forest products, etc. commercial revenues like profits of public sector enterprises, public utility services, etc. Unearned revenue is that revenue which is mobilise by the government without any contractual obligations to the payee. It includes taxes, fines and forfeitures, special assessment Levy, escheats, gifts and grants, etc. The most important source of government revenue is tax. I Meaning and Definition of Tax Tax is a compulsory payment by the citizens to the government to meet the public expenditure. It is legally imposed by the government on the tax payer and in no case tax payer can deny to pay taxes to the government. The tax payer also cannot expect any service or benefit from the government in return of tax payment. Thus, there is no quidpro-quo or give and take relationship in taxation. Tax can be direct nr indirect. Income tax, wealth tax, gift tax, etc. are the example of direct tax and sales tax, excise duty, custom duty, etc. are the example of indirect tax. According to Anatol Murad, A Tax is a compulsory payment made by a person or a firm to a government without reference to any benefit the payer may derive from the government." In the words of Dalton, "A Tax is a compulsory contribution imposed by public authority, irrespective of the exact amount of service rendered to the tax payer in return and not imposed as a penalty for any legal offence" According to Seligman, '" A Tax is a compulsory contribution from a person to the government to defray the expenditure incurred in the common interest of all , without reference to special benefit conferred. " Features or Characteristics of a Tax Main features of a tax are as follows; (1) Compulsory Payment: Tax is a compulsory payment. It has to be paid by every person in some way or the other on whom it as been levied. If the government imposes a tax upon a person, he has to pay it even against his wish. The public has to pay a tax whenever demanded by the government. Nobody can refuse to pay the tax and nor can any one evade it. Non-payment of tax invites penal action against the defaulter by the government. We can avoid the taxes imposed on goods so long as we do not buy them. For example, sales tax is imposed on a radio-set. If we do not buy a radio-set, we will not have to pay this tax at all. But it is not applicable to Direct Taxes, such as income tax. It is the responsibility of the person to pay the direct tax under all circumstances and cannot escape from it. (2) Public Welfare: Tax revenue is spent for the general and common benefit It does not benefit any single individual in particular, rather, entire society is benefited by it. As an

individual finds himself helpless to meet all his needs especially those which involve heavy expenditure e.g., the construction of a hospital and railway line, supply of water and electricity, etc. Here the Government renders such services for the benefit of all people. Hence taxes are imposed upon all those people, who are able to pay them, to share the common burden. (3) No Direct Service: The tax payer does not get any direct service as a quid-pro-quo. In other words, the tax is not in any way related to the benefit received from the government expenditure and the tax payer cannot expect any benefit from the government in proportion the tax paid by him. But this is not true for every tax, because there are certain taxes from whom the collected revenue is spent on those persons from whom these taxes have been collected. For example, the major portion of the revenue collected from road tax or petrol tax is spent on the repair and upkeep of roads. (4) No Proportionate Relation between the Tax and the Benefit: It is also not necessary that a tax payer gets the benefits from the government proportionately to the amount paid by him as tax. In other words a tax is not imposed on an individual by the government, because it has rendered specific services to him. Nor an individual has paid a tax because he receives special benefit from the government. Thus taxes are not paid because an individual receives benefit from the government or are taken from him because the government has rendered any services to him. But there are certain qualifications to it, e.g., a land tax is paid only by those individuals who possess land or derive benefit from land. Similarly, only those individuals will pay an entertainment tax who receives the benefit of entertainment. It is here Prof. Antonid de Viti de Marco pointed out that the law of taxation in modern state is based on the assumption of an exchange relationship, that is, the exchange of payment to the state for the provision of public service by the state. (5) Payment of Taxes is personal responsibility of an Individual: Payment of taxes is a personal responsibility of an individual. Tax has to be paid by a person even though the basis of its imposition may be goods. In other words a tax imposes a personal obligation on the tax payer. It means that it is the duty of the tax payer to pay the tax if he is liable to pay it and should in no case think to evade it Suppose a tax is imposed on the incomes of the individuals, the sources of income may be many and the public authority may not be in the know of all those sources. Here it is the duty of the tax payer to show all his income and take into account his total income while paying the tax. (6) Legal Procedure: Another feature of a tax is that it is imposed legally. Taxes are levied according to legal procedure. Elements of Tax From the above analysis, we can conclude that following are the main elements of a tax: (i) A tax is a compulsory contribution, if the tax payer has attained the condition for the imposition of tax, as laid down in the law. (ii) Taxes are imposed by the government only. If the management or a trust of a temple makes it compulsory for every family of a particular area to pay a specified sum every year, it can never be called a tax. (iii) In the payment of a tax, the element of sacrifice is involved, i.e., the tax payer pays the taxes for the general interest of the community.

(iv) The aim of the tax is the element of sacrifice as a whole i.e., lax revenue is incurred for the welfare of the community as a whole, and not of a particular section of the community atone hand and removing disparities of income on the other. (v) The benefit is not the condition of the payment of a tax. Taxes are exacted because they are compulsory, and public expenditure is done for the common benefit, and the benefit may not be in proportion of the payment of a tax. (vi) A tax is not imposed upon an individual to realize the cost of benefit from him. A poor person may be benefited most by way of public expenditure, but he may be least affected by way of taxation, i.e., a tax has no relation with the cost of service that a government renders to an individual. (vii) Taxes may be assessed on income or capital, but they are actually paid out of income. (viii) A tax may be imposed upon an individual or property or commodities, but they are actually paid by individuals. (ix) A tax is a legal collection. Objectives of Taxation Main objectives of taxation are as under: (1) To Get Income: Every government needs income to meet its expenditure. Taxation is one of the means of getting income. Taxation is a method by which government makes an attempt to earn the needed income by levying different taxes. (2) To Regulate and Control: Taxation also aims at regulating consumption, imports, exports, profit, etc. For example, in order to control or prohibit the consumption of liquor or other intoxicants government imposes heavy taxes on these goods. Similarly, goods whose imports are to be discouraged are burdened with heavy import duties. Consequently, prices of imported goods rise and their demand falls. Likewise, when in the social interest government wants to restrict the consumption of some goods then their prices are hiked by levying taxes. Taylor calls this objective as Surnptnory taxation. (3) Allocation of Resources: Change in the allocation of resources is another objective of taxation. If government wants to withdraw the resources from the production of luxuries and utilize the same for producing more of necessities, it imposes heavy taxes on luxuries and removes taxes from necessaries. As a result of more taxes on luxuries their prices rise and demand falls. Less demand means less production of these goods and less use of resources. These resources can be used for the production of necessities. (4) Reduction of Inequality: One of the principal objectives of taxation is to reduce inequality of wealth and income. On the one hand, by levying taxes at high rates on the rich, government collects large income and thereby reduces their wealth and income. On the other, die poor class is exempted from die payment of any income tax. The tax proceeds collected from the rich are utilized for providing various facilities to tl1e poor class and thus the living standard of the latter is improved. Taxation can, therefore, serve as an instrument to reduce inequalities of wealth and income. (5) Economic Development: Taxation also helps increase the rate of economic development of it country by taxes government can reduce the disposable income of the rich and hence their consumption of non-essential goods. On the other hand, the income earned by way of taxation is utilized in productive activities. As a result of it, productive capacity of the country increases and rate of economic development rises.

(6) Control Over Prices: Another objective of taxation is to control rise in prices. One of the causes of price rise is the expansion of the supply of money. When there is more money with the people there is more demand and hence rise in prices. Through taxes, government reduces the volume of money with the people. Consequently, there is fall in demand and also fall in the price level. In short, the objectives of taxation are to get revenue, check the consumption of harmful drugs, reduce inequalities of wealth and income, accelerate me rate of economic growth and control rise in prices. Qualities or Characteristics of a Good Taxation System An ideal taxation system is that which includes all types of taxes according to need. From Adam Smith to modern economists much has been explained about the theories of taxation that gives us a good base for the formation of qualities of a good taxation system. In this context Lutz says that neither a tax is completely good and nor completely bad" Practically no taxation system can be without defects. The famous Philosopher Edmund Burke tightly says that "It is difficult to tax and to please as it is love and to be wise.A taxation system may be good and very suitable at a particular time but with the change in time and conditions it may be unsuitable or inappropriate. According to Mrs. Ursula Hicks, taxation should possess the following qualities: (i) The taxes which are levied on the people, should be according to their paying ability. This ability to pay a tax depends on their income and family conditions; (ii) The objective of tax should be to provide public services; (iii) the taxation system should be based on universality. According to Prof. Musgrave, principal qualities of a good taxation system are as follows: (1) Equitable: Distribution of the burden of taxes should be equitable to all people. Taxation system should be such that every individual is able to contribute a fair share to it (2) Minimum Interference: The government should impose such taxes as cause minimum interference in the economic decisions of people. Excess burden of taxes should be minimized. (3) Check on the efficiency of Private Sector: Selection of taxes should be such that they serve as a check on the inefficiency of the private sector. In this context it may be said that the private sector try to evade the tax. Thus the taxation system should be designed such that the private sector may not utilise it to serve his selfish motive and thus deceive the tax authority. (4) Achievement of Growth Objective: 'Taxation system should be compatible with the objectives of fiscal policy, i.e. stabilisation, economic development etc. (5) Simple and Clear: Taxation system should be simple and clear so that die tax payers may follow it easily. Its management should also not involve complicated procedures. It should be easy and its rate, etc., should be fixed. (6) Less Expensive: A good taxation system is one which does not involve much expense on collection of taxes. If more expenses are incurred on the collection of a tax then the very purpose of the taxation is defeated. (7) Maximum Social Benefit: In a good taxation system taxes should be used to provide public utility services. In other words, die taxation should not be treated as an instrument of raising revenue only but an instrument for attaining certain social objectives also such redistribution of wealth and thereby reducing inequalities of income. Taxation may be used to finance pubic services. It can also be used to control and regulate consumption e.g., restriction of alcoholic liquors by means of heavy excise duties. All the measures

will increase social welfare of the society. Thus, a good tax system should increase social welfare of the society and ensure maximum social benefit to the society and should not be regarded only as a means of securing revenues. (8) Based on Canons of Taxation: A good taxation system is one that embodies maximum canons of taxation, like, equity, convenience, certainty, economy, productivity, flexibility, simplicity, etc. (9) Built-in-Flexibility: A good taxation system has built-in-flexibility. It implies that taxes are increased or decreased as required. The rates of taxes are modified as per need in such a way that without adversely affecting the economic system revenue requirements are fulfilled. (10) Balanced: A good taxation system should be balanced one. It means that taxation system should have a balanced mix of all types of taxes. It should not only contain progressive and proportional taxes but the same should have a balanced mixing. (11) Wagners Qualities of Good Taxation: According to Wagner, a good taxation system should fulfill the following criteria: i) Financial Criterion: It should be productive from financial point of view. It should yield adequate revenue and be flexible. (ii) Economic Criterion: It should incorporate those taxes which have salutary effect on countrys economic progress. (iii) Welfare Criterion: It should be based on the canon of equity. Its incidence on the people should be equitable. (iv) Administrative Criterion: A good taxation system should be convenient, economical, simple and efficient. (12) Universal Application of Taxes: Each individual should pay according to his ability to pay, and the individuals possessing the same ability to pay, should contribute the same amount by way of taxes. In India the taxation system, however, this attribute is lacking to some extent, e.g., income tax is not universal and uniform in its application in India, as income from agriculture is not taxed to the extent the incomes have been taxed in the non-agriculture sector. This may create dissatisfaction in the heart of those people who are engaged in non-agriculture sector. It may also result in creating imbalances in the economy. Hence, a good tax system should ensure universal and uniform application of taxes to each individual of the society without any discrimination. (13) Increase in Revenue of the Government with the Increase in National Income: The structure of the tax system should be such that an increasing proportion of the increment to national income gets automatically siphoned off into the State treasury without any additional tax effort on the part of the government. (14) Just Distribution of' tax Burden: A good tax system should ensure a just distribution of tax-burden. There are three theories on the just distribution of tax burden:(i) The Cost Theory: The taxation should be measured by the cost of service rendered to individual tax payer by the public authority; (ii) The Benefit Theory: The taxation should be measured by the benefit to individual tax payer of such service; and (iii) The Ability to Pay Theory: The determination of the tax should be according to the ability to pay of the tax payer. (i) The Cost of Service Theory cannot be applied to services paid out of the proceeds of taxes as against price. The cost, prices and fees cannot be the basis of taxation. A tax is a compulsory levy taken from all alike and without any regard to the use of services by die individuals supplied by the government. Thus, the cost of service principle is not practically applicable. Similarly, since the cost of service principle rendered to individual

tax payer cannot be determined, the benefit can also not be determined except in a few rare cases such as old age pensions. (ii) The Benefit Theory: The pensioner under the benefit of service principle has to return whole pension to the treasury. If exceptions or qualifications are to be made, then it is not clear on what principle and to what extent such exceptions are to be made. (iii) Ability to Pay Theory: In the last, we have to choose the principle of ability to pay. Though there are difficulties in estimating the ability to pay of each tax payer, yet this principle has been regarded as the best among all for Levying taxes. In fact, a good taxation system should have minimum aggregate sacrifice and should fall more heavily on the richer sections of the society than on the poor. Hence, a Good tax system is based on die principle of progression. In short, the taxation should increase gradually in a good tax system i.e., step by step and in times of emergency like war, heavy taxation may be feasible. A heavy taxation which adversely affects the economic life of the people is never desirable. A good taxation system is one that takes into consideration the problems and rights of the taxpayers. It mostly includes those taxes which aim at reducing inequalities, promoting social welfare and achieving of the objective of economic development. In this context both direct and indirect taxes should be followed by the tax system, but it should not have regressive effects. Finally, it is concluded that a good tax system should be designed so as to meet the requirements of equity, efficiency and convenience of tax payers and administration both. Canons of Taxation Economists have enunciated certain principles of a good taxation system. Adam Smith, father of the modern economics, presented four principles of a good taxation system, called Adam Smiths Canon of Taxation. (1) Adam Smith's Canon of Taxation (i) Canon of Equity: According to Adam Smith, "People of every state should pay their share in proportion to their individual abilities, which means that they should pay taxes proportionate to that income which they respectively get under the government security. This means that people should pay taxes according to their capacity. Equity does not mean that all people should pay equal taxes. It, in fact, means that every one should make equal sacrifice. Equity means equality of sacrifice. For the rich, marginal utility of money is less than that for the poor. So, the rich people should pay more amounts in taxes than the poor people. Thus, the principle of justice is also vested in this doctrine. According to Adam Smith, it will be more justified for the rich to contribute to the public expenditure not only what is proportionate to their income, but more than that. Mill, Chapman, Seligmen etc., subscribe to the canon of Equity. (ii) Canon of Certainty: According to this principle, there should be a certainty regarding taxes. Adam Smith says, "The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought to he clear and plain to the contributor and to every other person. " Several types of certainty are required in a taxation system. First of all, the individual must know how much tax he is to pay. Secondly, he must know at what time he is to pay tax so that it can be arranged by that time. Thirdly, he must know in how many installments he has to pay his tax, fourthly, the tax-payer should know where and to

whom he has to pay the tax. Certainty of tax is essential not only for the tax-payer, but also for the state. Government ascertains its expenditure only after making an estimate about taxes. The saying, 'An old tax is no tax ' illustrates the theme of the canon of certainty. (iii) Canon of Convenience: According to this canon, the convenience of the tax-payer also is kept in mind while imposing taxes. In the words of Adam Smith, "Every tax ought to be levied at the time and in the manner in which it is most likely to he convenient for the contributor to pay it." Every tax should be collected at the time and in the manner in which there is no difficulty for the tax-payer to pay tax. If a tax is collected at the time and in the manner which are inconvenient to the tax-payer, even the minimum amount of tax will prove to be burdensome for him. Contrary to it, if a tax is collected at the time and in the manner which are convenient to the tax-payer, he will not avoid even the maximum amount of taxes. (iv) Canon of Economy: According to this canon, the costs of tax collection should be the lowest possible. Taxation system should not be much expensive. Every tax should be levied in such a way that the government does not have to make much expenditure on its collection, and the tax-payer, too, does not have to spend much while paying his taxes. Adam Smith says, "Every tax ought to be levied so that the minimum extra amount comes out of the tax-payer pocket besides the amount to he received by the government exchequer through tax-payment. Modern economists consider the meaning of economy in a wider perspective. They think that if the levying of a tax effects the economic situation, trade and industry adversely, it cannot be termed economical. From this angle, heavy income-tax does not satisfy the canon of economy. But heavy taxes on drugs and intoxicants can be justified. Thus, economy means that there should be a minimum expenditure in collecting taxes, and a tax should not have an adverse affect on the production of the society and peoples will to save and invest. (2) Other canons of taxation Adam Smith described the afore-mentioned canons of taxation about 200 years ago. Since then, there has been a lot of change in the economic activities. Modern economists have designed several new canons of taxation, as under: (i) Canon of Elasticity: Taxation system should be elastic enough to recover additional revenue so as to cope with additional expenditures of the Govt. However, it is imperative at the same time that increase in revenue does not cause undue increase in the expenditure on collection of additional taxation. (ii) Canon of Productivity: Bastable has propounded this hypothesis. It means that taxes should be few in number yielding large revenue, without causing much suffering to the masses. It also implies that taxation system does not adversely affect trade and industry and there should be possibility of large revenue in future. This canon, in fact, is very close to Adam Smiths canon of economy. (iii) Canon of Variety: There should be a multiple taxation system instead of single taxation system. According to this canon, taxes should be of different types so that every citizen of the country bears the burden of taxes to some extent. A balance between direct taxes and indirect taxes is the essence of this hypothesis. (iv) Canon of Simplicity: Taxation system should be simple so that even the common people are able to comprehend it. Thus there will be less possibility of tax evasion.

(v) Canon of Desirability: New taxes should be levied only with justification so that their desirability is established and the public does not register any protest while paying taxes. No tax should be imposed with a wrong motive. (vi) Canon of Flexibility: A Good taxation system should be flexible as well to incorporate the necessary changes easily as and when desired. (vii) Canon of Popularity: Taxes should be popular so that there is no opposition towards their payment. (viii) Canon of Buoyancy: Taxation system should be such that the revenue obtained from taxes goes on increasing automatically along with the increase in the national income. (ix) Canon of Co-ordination: Central, state and local governments levy separate taxes these days. A co-ordination should be established between the taxes levied by these governments. A similar type of tax should not be imposed by different governments. Taxable Capacity: While studying the taxation system, we shall also like to know about the taxable capacity of the people of a country Taxable capacity invariably refers to the maximum capacity of paying a tax. Or, it indicates the maximum amount of a tax which may be collected from a particular tax-payer or from a group of tax-payers. The taxable capacity of a country is the maximum amount which its citizens can contribute towards the expenditure of public authorities without having a really unhappy and downtrodden existence and without dislocating organisation too much." Josiah Stamp - "'Taxable capacity of a country is maximum amount which the citizens of a country can contribute towards the expenses of the public authorities without hurting to undergo an unbearable strain." Findley Shirras Kinds Taxable capacity can be of two types: (i) Absolute Taxable Capacity: Absolute Taxable Capacity means the maximum amount of money or proportion of national income that can be taken by the government in the form of taxes without producing unpleasant effects. Prof. J.K.Mehta says that "the absolute taxable capacity of a country is the maximum amount of money that can be taken from the public through taxes"

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