GUPTA COLLEGE OF MANAGEMENT AND

TECHNOLOGY
ASSIGNMENT -1

ORIGIN OF TAXATION AND PRINCIPLES OF TAXATION

PRESENTED TO:

PROF.ASHOK DHARWADKAR

PRESENTED BY:

CHAITHANYA.R

2 nd SEM MFA

1
CONTENTS:

Origin of Taxation

Forms of Taxation

Principles of Taxation

Cannons of Taxation

Views of Taxation

Bibliography

2
ORIGIN OF TAXATION

History of Taxation PRE – 1922

 

"It was only for the good of his subjects that he collected taxes from them, just as the Sun draws
moisture from the Earth to give it back a thousand fold" –
                                    --Kalidas in Raghuvansh eulogizing KING DALIP.
 
It is a matter of general belief that taxes on income and wealth are of recent origin but there is
enough evidence to show that taxes on income in some form or the other were levied even in
primitive and ancient communities. The origin of the word "Tax" is from "Taxation" which means
an estimate. These were levied either on the sale and purchase of merchandise or livestock and were
collected in a haphazard manner from time to time. Nearly 2000 years ago, there went out a decree
from Ceaser Augustus that all the world should be taxed. In Greece, Germany and Roman Empires,
taxes were also levied sometime on the basis of turnover and sometimes on occupations. For many
centuries, revenue from taxes went to the Monarch. In Northern England, taxes were levied on land
and on moveable property such as the Saladin title in 1188. Later on, these were supplemented by
introduction of poll taxes, and indirect taxes known as "Ancient Customs" which were duties on
wool, leather and hides. These levies and taxes in various forms and on various commodities and
professions were imposed to meet the needs of the Governments to meet their military and civil
expenditure and not only to ensure safety to the subjects but also to meet the common needs of the
citizens like maintenance of roads, administration of justice and such other functions of the State.
 
In India, the system of direct taxation as it is known today has been in force in one form or another
even from ancient times. There are references both in Manu Smriti and Arthasastra to a variety of
tax measures. Manu, the ancient sage and law-giver stated that the king could levy taxes, according
to Sastras. The wise sage advised that taxes should be related to the income and expenditure of the
subject. He, however, cautioned the king against excessive taxation and stated that both extremes
should be avoided namely either complete absence of taxes or exorbitant taxation. According to

3
him, the king should arrange the collection of taxes in such a manner that the subjects did not feel
the pinch of paying taxes. He laid down that traders and artisans should pay 1/5 th of their profits in
silver and gold, while the agriculturists were to pay 1/6 th, 1/8th and 1/10th of their produce depending
upon their circumstances. The detailed analysis given by Manu on the subject clearly shows the
existence of a well-planned taxation system, even in ancient times. Not only this, taxes were also
levied on various classes of people like actors, dancers, singers and even dancing girls. Taxes were
paid in the shape of gold-coins, cattle, grains, raw-materials and also by rendering personal service.
 
The learned author K.B.Sarkar commends the system of taxation in ancient India in his book
"Public Finance in Ancient India", (1978 Edition) as follows:-
"Most of the taxes of Ancient India were highly productive. The admixture of direct taxes with
indirect Taxes secured elasticity in the tax system, although more emphasis was laid on direct tax.
The tax-structure was a broad based one and covered most people within its fold. The taxes were
varied and the large variety of taxes reflected the life of a large and composit population".
 
However, it is Kautilya’s Arthasastra, which deals with the system of taxation in a real elaborate
and planned manner. This well known treatise on state crafts written sometime in 300 B.C., when
the Mauryan Empire was as its glorious upwards move, is truly amazing, for its deep study of the
civilisation of that time and the suggestions given which should guide a king in running the State in
a most efficient and fruitful manner. A major portion of Arthasastra is devoted by Kautilya to
financial matters including financial administration. According to famous statesman, the Mauryan
system, so far as it applied to agriculture, was a sort of state landlordism and the collection of land
revenue formed an important source of revenue to the State. The State not only collected a part of
the agricultural produce which was normally one sixth but also levied water rates, octroi duties,
tolls and customs duties. Taxes were also collected on forest produce as well as from mining of
metals etc. Salt tax was an important source of revenue and it was collected at the place of its
extraction.
 
Kautilya described in detail, the trade and commerce carried on with foreign countries and the
active interest of the Mauryan Empire to promote such trade. Goods were imported from China,
Ceylon and other countries and levy known as a vartanam was collected on all foreign commodities
imported in the country. There was another levy called Dvarodaya which was paid by the concerned
businessman for the import of foreign goods. In addition, ferry fees of all kinds were levied to
augment the tax collection.
 
Collection of Income-tax was well organised and it constituted a major part of the revenue of the
State. A big portion was collected in the form of income-tax from dancers, musicians, actors and
dancing girls, etc. This taxation was not progressive but proportional to the fluctuating income. An
excess Profits Tax was also collected. General Sales-tax was also levied on sales and the sale and
the purchase of buildings was also subject to tax. Even gambling operations were centralised and
tax was collected on these operations. A tax called yatravetana was levied on pilgrims. Though
revenues were collected from all possible sources, the underlying philosophy was not to exploit or
over-tax people but to provide them as well as to the State and the King, immunity from external
and internal danger. The revenues collected in this manner were spent on social services such as
laying of roads, setting up of educational institutions, setting up of new villages and such other
activities beneficial to the community.
 
The reason why Kautilya gave so much importance to public finance and the taxation system in the
Arthasastra is not far to seek. According to him, the power of the government depended upon the
strength of its treasury. He states – "From the treasury, comes the power of the government, and the
Earth whose ornament is the treasury, is acquired by means of the Treasury and Army". However,
he regarded revenue and taxes as the earning of the sovereign for the services which were to be
rendered by him to the people and to afford them protection and to maintain law and order. Kautilya
emphasised that the King was only a trustee of the land and his duty was to protect it and to make it
more and more productive so that land revenue could be collected as a principal source of income

4
for the State. According to him, tax was not a compulsory contribution to be made by the subject to
the State but the relationship was based on Dharma and it was the King’s sacred duty to protect its
citizens in view of the tax collected and if the King failed in his duty, the subject had a right to stop
paying taxes, and even to demand refund of the taxes paid.
 
Kautilya has also described in great detail the system of tax administration in the Mauryan Empire.
It is remarkable that the present day tax system is in many ways similar to the system of taxation in
vogue about 2300 years ago. According to the Arthasastra, each tax was specific and there was no
scope for arbitratiness. Precision determined the schedule of each payment, and its time, manner
and quantity being all pre-determined. The land revenue was fixed at 1/6 share of the produce and
import and export duties were determined on advalorem basis. The import duties on foreign goods
were roughly 20 per cent of their value. Similarly, tolls, road cess, ferry charges and other levies
were all fixed. Kautilya’s concept of taxation is more or less akin to the modern system of taxation.
His overall emphasis was on equity and justice in taxation. The affluent had to pay higher taxes as
compared to the not so fortunate. People who were suffering from diseases or were minor and
students were exempted from tax or given suitable remissions. The revenue collectors maintained
up-to-date records of collection and exemptions. The total revenue of the State was collected from a
large number of sources as enumerated above. There were also other sources like profits from Stand
land (Sita) religious taxes (Bali) and taxes paid in cash (Kara). Vanikpath was the income from
roads and traffic paid as tolls.
 
He placed land revenues and taxes on commerce under the head of tax revenues. These were fixed
taxes and included half yearly taxes like Bhadra, Padika, and Vasantika. Custom duties and duties
on sales, taxes on trade and professions and direct taxes comprised the taxes on commerce. The
non-tax revenues consisted of produce of sown lands, profits occuring from the manufacture of oil,
sugarcane and beverage by the State, and other transactions carried on by the State. Commodities
utilised on marriage occasions, the articles needed for sacrificial ceremonies and special kinds of
gifts were exempted from taxation. All kinds of liquor were subject to a toll of 5 percent. Tax
evaders and other offenders were fined to the tune of 600 panas.
 
Kautilya also laid down that during war or emergencies like famine or floods, etc. the taxation
system should be made more stringent and the king could also raise war loans. The land revenue
could be raised from 1/6th to 1/4th during the emergencies. The people engaged in commerce were to
pay big donations to war efforts.

Taking an overall view, it can be said without fear of contradiction that Kautilya’s Arthasastra was
the first authoritative text on public finance, administration and the fiscal laws in this country. His
concept of tax revenue and the on-tax revenue was a unique contribution in the field of tax
administration. It was he, who gave the tax revenues its due importance in the running of the State
and its far-reaching contribution to the prosperity and stability of the Empire. It is truly an unique
treatise. It lays down in precise terms the art of state craft including economic and financial
administration.

History of Taxation post 1922

 

1. Preliminary :

The rapid changes in administration of direct taxes, during the last decades, reflect the
history of socio-economic thinking in India. From 1922 to the present day changes in direct
tax laws have been so rapid that except in the bare outlines, the traces of the I.T. Act, 1922
can hardly be seen in the 1961 Act as it stands amended to date. It was but natural, in these
circumstances that the set up of the department should not only expand but undergo
structural changes as well.

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2. Changes in administrative set up since the inception of the department:

The organisational history of the Income-tax Department starts in the year 1922. The
Income-tax Act, 1922, gave, for the first time, a specific nomenclature to various Income-
tax authorities. The foundation of a proper system of administration was thus laid. In 1924,
Central Board of Revenue Act constituted the Board as a statutory body with functional
responsibilities for the administration of the Income-tax Act. Commissioners of Income-
tax were appointed separately for each province and Assistant Commissioners and Income-
tax Officers were provided under their control. The amendments to the Income tax Act, in
1939, made two vital structural changes: (i) appellate functions were separated from
administrative functions; a class of officers, known as Appellate Assistant Commissioners,
thus came into existence, and (ii) a central charge was created in Bombay. In 1940, with a
view to exercising effective control over the progress and inspection of the work of
Income-tax Department throughout India, the very first attached office of the Board, called
Directorate of Inspection (Income Tax) - was created. As a result of separation of executive
and judicial functions, in 1941, the Appellate Tribunal came into existence. In the same
year, a central charge was created in Calcutta also.
2.1 World War II brought unusual profits to businessmen. During 1940 to 1947, Excess
Profits Tax and Business Profits Tax were introduced and their administration handed
over to the Department (These were later repealed in 1946 and 1949 respectively). In
1951, the 1st Voluntary Disclosure Scheme was brought in. It was during this period, in
1946, that a few Group 'A' officers were directly recruited. Later on in 1953, the Group
'A' Service was formally constituted as the 'Indian Revenue Service'.
2.2 This era was characterised by considerable emphasis on development of investigation
techniques. In 1947, Taxation on Income (Investigation) Commission was set up which
was declared ultra vires by the Supreme Court in 1956 but the necessity of deep
investigation had by then been realised. In 1952, the Directorate of Inspection
(Investigation) was set up. It was in this year that a new cadre known as Inspectors of
Income Tax was created. The increase in 'large income' cases necessitated checking of
the work done by departmental officers. Thus in 1954, the Internal Audit Scheme was
introduced in the Income-tax Department.
2.3 As indicated earlier, in 1946, for the first time a few Group A officers were recruited in
the department. Training them was important. The new recruits were sent to Bombay
and Calcutta where they were trained, though not in an organised manner. In 1957,
I.R.S. (Direct Taxes) Staff College started functioning in Nagpur. Today this attached
office of the Board functions under a Director-General. It is called the National
Academy of Direct Taxes. By 1963, the I.T. department, burdened with the
administration of several other Acts like W.T., G.T., E.D., etc., had expanded to such
an extent that it was considered necessary to put it under a separate Board.
Consequently, the Central Board of Revenue Act, 1963 was passed. The Central Board
of Direct Taxes was constituted, under this Act.
2.4 The developing nature of the economy of the country brought with it both steep rates of
taxes and black incomes. In 1965, the Voluntary Disclosure Scheme was brought in
followed by the 1975 Disclosure Scheme. Finally, the need for a permanent settlement
mechanism resulted in the creation of the Settlement Commission.
2.5 A very important administrative change occurred during this period. The recovery of
arrears of tax which till 1970 was the function of State authorities was passed on to the
departmental officers. A whole new wing of Officers - Tax Recovery Officers was
created and a new cadre of post of Tax Recovery Commissioners was introduced w.e.f.
1-1-1972.
2.6 In order to improve the quality of work, in 1977, a new cadre known as IAC
(Assessment) and in 1978 another cadre known as CIT (Appeals) were created. The
Commissioners' cadre was further reorganised and five posts of Chief Commissioners

6
 (Administration) were created in 1981.
2.7 Tax Reforms : Certain important policy and administrative reforms carried out over
the past few years are as follows :-
(a). The policy reforms include :-
 Lowering of rates;
 Withdrawals/reduction of major incentives;
 introduction of measures for presumptive taxation;
 simplification of tax laws, particularly relating to capital gains; and
 Widening the tax base.

(b). The administrative reforms include :-

 Computerisation involving allotment of a unique identification
number to tax payers which is emerging as a unique business
identification number; and
 Realignment of the available human resources with the changed
business needs of the organisation.

2.8 Computerisation: Computerisation in the Income-tax Department started with the

setting up of the Directorate of Income tax (Systems) in 1981. Initially computerisation
of processing of challans was taken up. For this 3 computer centres were first set up in
1984-85 in metropolitan cities using SN-73 systems. This was later extended to 33
major cities by 1989. The computerized activities were subsequently extended to
allotment of PAN under the old series, allotment of TAN, and pay roll accounting.
These computer centres used batch process with dumb terminals for data entry.
In 1993 a Working Group was set up by the Government to recommend
computerisation of the department. Based on the report of the Working Group a
comprehensive computerisation plan was approved by the Government in October,
1993. In pursuance of this, Regional Computer Centres were set up in Delhi, Mumbai,
and Chennai in 1994-95 with RS6000/59H Servers. PCs were first provided to officers
in these cities in phases. The Plan involved networking of all users on LAN/WAN.
Network with leased data circuits were accordingly set up in Delhi, Mumbai and
Chennai in Phase-I during 1995-96. A National Computer Centre was set up at Delhi
in 1996-97. Integrated application software were developed and deployed during
1997-99. Thereafter, RS6000 type mid range servers were provided in the other 33
Computer Centres in various major cities in 1996-97. These were connected to the
National Computer Centre through leased lines. PCs were provided to officers of
different level up to ITOs in stages between 1997 and 1999. In phase II offices in 57
cities were brought on the network and linked to RCCs and NCC.
2.9 Restructuring of the Income-tax department : The restructuring of the Income-tax
Department was approved by the Cabinet in its meeting held on 31-8-2000 to achieve
the following objectives :-
 Increase in effectiveness and productivity;
 Increase in revenue collection;
 Improvement in services to tax payers;
 Reduction in expenditure by downsizing the workforce;
 Improved career prospects at all levels;
 Induction of information technology; and
 Standardization of work norms

The aforementioned objectives have been sought to be achieved by the department

through a multi-pronged strategy of :
  a. redesigning business processes through functionalisation;

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 b. increasing the number of officers to rationalise the span of control for better
supervision, control and management of workload and to improve tax-payer
services and
c. re-orient, retrain and redeploy the workforce with appropriate incentives in
the form of career advancement.
3. Important events affecting the administrative set up in the Income-tax department:
1939  Appellate functions separated from inspecting functions.
 A class of officers known as AACs came into existence.
 Jurisdiction of Commissioners of Income tax extended to certain classes
of      cases and a central charge was created at Bombay.
1940  Directorate of Inspection (Income-tax) came into being.
 Excess Profits Tax introduced w.e.f. 1-9-1939.
1941  Income-tax Appellate Tribunal came into existence.
 Central charge created at Calcutta.
1943  Special Investigat
on Branches set up.
1946  A few officers of Class-I directly recruited.
 Demonetisation of high denomination notes made.
 Excess Profits Tax Act repealed.
1947  Business Profits Tax enacted (for the period 1-4-1946 to     31-3-1949).
1951  Report of Income-tax Investigation Commission known as Vardhachari
Commission received.
 Voluntary Disclosure Scheme introduced.
1952  Directorate of Inspection (Investigation) set up.
 Inspector of Income-tax declared as an I.
. authority.
1953  Estate Duty Act, 1953 came into existence w.e.f. 15-10-1953.
 Act XXV of 1953 gave effect to the recommendations of Commission
appointed under Taxation of Income (Investigation     Commission) Act,
1947.
1954  Internal Audit Scheme in the Income-tax Department introduced.
 Taxation Enquiry Commission known as John Mathai Commission set
up.
1957  The Wealth tax Act, 1957 introduced w.e.f. 1-4-1957.
 I.R.S.(DT) Staff College started functioning at Nagpur and much     later
four R.T.Is. Stationed at Bombay, Calcutta, Bangalore and     Lucknow
opened.
1958 LI>The Gift-tax Act, 1958 introduced w.e.f. 1-4-1958.
 Report of Law Commission received.
1959  Direct Taxes Administration Enquiry Commi
tee submitted its report.
1960  Directorate of Inspection (Research, Statistics & Publications)was set up.
 Two grades of Inspectors - selection and ordinary grades -     merged into
one single grade.
1961  Direct Taxes Advisory Commit
ee set up - Direct Taxes Administrative Enquiry Committee constituted.
 Income-tax Act, 1961 came into existence w.e.f. 1-4-1962.

8
  Revenue Audit introduced for the first time in the Department.
 New system for evaluation of work done by Income-tax O
ficers introduced.
1963  Central Board of Revenue bifurcated and a separate Board for Direct
1964 Taxes known as Central Board of Direct Taxes (CBDT) constituted under
the Central Board of Revenue Act, 1963.
 For the first time an officer from
the department became Chairman of the CBDT w.e.f. 1-1-1964.
 The Companies (Profits) Sur -tax Act, 1964 was introduced.
 Annuity Deposit Scheme, 1964 introduced.
1965  Voluntary Disclosure Scheme came into operation.
1966  Functional
Scheme introduced.
 Special Recovery Unit created.
 Intelligence Wing created and placed under the charge of Directorate of
Inspection (Investigation).
1968  Valuation Cell came into existence in the Income tax Department.
 Report of ration
lisation and simplification of tax structure (Bhoothalingam Committee)
received.
 Administrative Reforms Commission set up.
1969  Direct Recruitment to Class II Income-tax Officers made.
 The post of IAC (Audit) created in the Income-tax Depa
tment.
1970  The posts of Addl. Commissioner of Income-tax created and  abolished
after one year.
 Recovery functions which w
re hitherto performed by Income-    tax Officers, given to Tax Recovery
Officers. Prior to that State     Government of
icials exercised the functions of a Tax Recovery Officer.
1971  A new cadre of posts known as Tax Recovery Commissioners     i
troduced w.e.f. 1.1.1972.
 Report of Direct Taxes Enquiry Committee received.
 Summary Assessment Scheme introduced
w.e.f. 1-4-1971.
1972  A Special Cell within the Directorate of Inspection (Investigation)
created to oversee the cases of big
industrial houses.
 A new cadre of posts known as IAC (Acq.) created and IAC     appointed
as Competent Authority with the insertion of new     Chapter XXA in the
Income Tax Act, 1961 on the acquisition of     immovable properties in
certain cases of transfer to counter     evasion of tax.
 Directorate of Organisation & Management Services (Income tax)
 The post of
.T.O. (Internal Audit) created.
 Bradma Scheme in the Income-tax Department introduced.
 System of Permanent Account Number introdu
ed.
 Valuation Officers given statutory powers under the Income-tax  Act,

9
 1961 and Wealth-tax Act, 1957.
1974  Compulsory Deposit Scheme (Income-tax Payers) Act, 1974 introduced.
 Action Plan for the Income-tax Officers introduced for the firs
time.
 Concept of M.B.O introduced.
1975  Voluntary Disclosure Scheme for Income and Wealth implemented.
 Special Cell for dealing with Smugglers' cases created.
1976  Settlement Commission created and Taxation Laws (Amendment) Act,
975 inserted a new Chapter XIXA in the Income Tax Act w.e.f.1-4-1976.
 Smugglers and Foreign Exchange Manipulators (F
rfeiture of Property) Act, 1976 introduced w.e.f. 25-1-1976.
 A new scheme for departmentalization of accounts introduced.
 Chokshi
Committee submitted its interim report.
1977  A new cadre of posts known as IAC (Assessment) created.
1978  Appellate functions given to a new cadre of Commissioners     known as
Commissioner (Appeals).
 Directorate of Inspection (Reco
ery) set up.
 A new directorate known as Directorate of Inspection (Vigilance)
came into existence by bifurcating
the functions of Directorate of     Inspection (Investigation).
 Chokshi Committee submitted its final report.
1979  A new d
rectorate designated as Directorate of Inspection     (Publication & Public
Relations) created out of the Directorate o
 Inspection (RS&P).
1980  Hotel Receipt Tax Act, 1980 came into force w.e.f. 1.4.1981.
1981  Economic Administrative eforms Commission set up.
 Three new Directorates viz. Directorate of Inspection     (Intelligence),
Directorate of In
pection (Survey) and Directorate     of Inspection (Systems) created.
 Within the Directorate of Inspection (Income Tax and Audit),
    separate Director of Inspection (Audit) appointed.
 Directorate of Inspection (RS&P) re-organised and Directorate
of     Inspection (P&PR) re-designated as Directorate of Inspection
(Printing & Publications).
 I.R.S.(DT) Staff College, Nagpur
re-designated as National     Academy of Direct Taxes.
 Special Bearer Bonds (Immunities & Exemptions) Act     promul
ated.
 Director General (Special Investigation) and Director General
(Investigation) appointed to control the functioning of var
ous     Directorates under the control of Central Board of Direct Taxes.
 Five posts of Chief Commissioner (Administr
tion) created.
 A few posts of Commissioner of Income-tax were earmarked as
Commissioner of Income-tax (Inv.) and Commissioner o
Income-    tax (Recovery).
1982  Special Cell within the Directorate of Inspection (Investigation)
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1983  The vigilance set up reorganised and the strength of Dy. Director
(Vigilance) and Asstt. Director (Vigilance) augmented.
 Computerised systems for processing challan
and PAN designed and developed.
1984  Taxation Laws(Amendment) Act 1984 passed to streamline
procedures in the interest of better work management;
avoid     inconvenience to tax payers; reduce litigation; remove     anomalies
and rationalis
some provisions.
1985  Post of Director General (Investigation) created for more     effective
checking of tax evasion.
 E.D.(Amendment) Act 1985 dis
ontinues levy of estate duty on     deaths occurring on or after 16.03.1985.
 Compulsory De
osit Scheme (Income Tax Payers) Act 1974     discontinued w.e.f. 1.4.1985.
 Interest Tax Act, 1974 discontinued w.e.f. 31.3.1985
 A new "Reward Scheme" for
otivating officers introduced w.e.f. 1.4.1985.
1986  The I.T. Act and W.T. Act amen
ed by Taxation Laws     (Amendment and Miscellaneous Provisions) Act :-
 Established Settlement Commission.
 Introduced Block assets concept for depreciation
 Four offices of Appropriate Authority for acquiring property in  which
unaccounted money i
invested set up in metropolitan cities.
1987  Government’s approval obtained to set up three new benches of
Settlement Commission.
 L.K. Jha Commit
ee set up for simplification and rationalisation of tax laws.
 Office of Directorate Genera
(Tax Exemption) set up at Calcutta.
 The Direct Tax Law(Amendment) Act 1987 introduced uniform
previous year and redesignated the following authorities :
Director of Inspection Director of Income Tax
Insp. Asstt. Commissioner of I. Tax Dy. Commissioner of Income Tax.
Appellate. Asstt. Commissioner -Do- (Appeals)
Income tax Officer Gr. A Asstt. Commissioner of I.Tax
Income tax Officer Gr. B Income tax Officer
 Expenditure Tax Act 1987 brought into force.
1988  Benami Trans
ctions Prohibition Act 1988 introduced.
 The Government announced a "Time Window Scheme" which
allowed tax payers 50% rebate of interest u/s 220(2) if they pay     the tax an
balance interest. The scheme was in operation     between 1.7.88 to 30.9.
8.
 CIT (Central) placed under the control and supervision of     Director
General (Investigation).
 Government decided that cadre control for Group 'C' and 'D'     posts
would
be with Chief Commissioner and with CBDT for     Group 'A' and 'B'posts.

11
  Extension of Direct Tax Law to the State of Sikkim by a     notification
of the President of India dated 7.11.1988.
1989  Creation of an attached office of DGIT(Manageme
t Systems) to     supervise Directorate of I.Tax(Research, Statistics, Pub
ication &     Public Relations) and Directorate of I.Tax (Organisation and
Management Services) from Sept. 1989.
1990  Gift tax Bill introduced on 31.5.1990.
 Creation of 65 posts of Dy. Commissioner of I.Tax by  upgradation of
equal number
of posts of Asstt. Commissioner of I.Tax.
1991  Interest Tax Act, 1974 revived.
 Directorate of I.Tax (Systems) started reporting directly to Board.
1992  Rs. 1
00 Presumptive Taxation scheme introduced as a measure     to widen tax ba
e.
 The post of Director General of Income-tax (Management     Systems)
was abolished.
1993  40 additional posts of Commissioner of Income-tax (Appeals) created.
 Authority for Advance Rulings set up.
 A comprehensive phased cadre review fo
Group B, C and D initiated.
1994  2068 additional posts in Group B, C and D sanctioned.
 New PAN introduced.
 Regional Computer Centres (RCCs) were set up in Chennai,
    Delhi and Mumbai.
1995  New procedure for search assessment i
troduced.
 50 years of training commemorated and "Seminar Twenty Five"
introduced by National Academy of Direct Taxes.
1996  77 posts of Commissioners of Income-tax
reated.
 Infrastructure for operational needs strengthened.
 Study rep
rt on 4th cadre review of Group 'A' officers (IRS) of the Department
prepared by Directorate of Income Tax     (Organisation and Management
Services).
1997  Rates of Incom
-tax reduced significantly.
 Legal measures to widen tax base on certain
economic     indicators introduced in selected cities.
 Presumptive tax scheme discontinued.
 Voluntary Disclosure Scheme 1997 introduced.
 Minimum Alternate Tax introduced.
 National Computer Centre (NCC) was set up in Delhi.
1998  Sec.
60A introduced enabling direct appeals to High Court.
 1/6 Scheme & penalty for non-filing of return introduced to widen     tax
base.
 Gift-tax abolished for gifts made after

12
 .10.1998.
 Kar Vivad Samadhan Scheme 1998 introduced.
 Silver Jubilee
f Regional Training Institutes celebrated.
 Designation of Asstt. Commissioner (Senior Time Scale) changed     to
Dy. Commissioner and that of Dy. Commissioner (Junior     Admini
trative Grade) to Joint Commissioner.
1999  Furnishing details of
bank account and credit cards in the     prescribed form made mandatory for
refund purpose.
 Prima-facie adjustments to return done away with;     acknowledgments
to serve as int
mations.
 Samman Scheme introduced in 1999 to honour deserving tax payer
.
2000  The process of implementation of restructuring of the     Department
commenced to increase efficiency and to deal with     increased workload.
 Total sanctioned
ork force reduced from 61,031 to 58,315.
 Certain rationalisation measur
s at structural levels introduced.
 Interest-tax Act terminated with effect from 1-4-2000.
2001  The restructuring of the Department resulted in reducing the     stagnat
on at all levels and large number of personnel were     promoted in variou
grades.
 Jurisdiction pattern was revamped.
 New posts were created at the level of DGIT/DIT in the areas of
Research, International Taxation and Infrastructure.
2002  Computerised processing of returns all over the country     introduced.
 Kelkar Committee Report, inter alia, recommended :-
i. Outsourcing of non-core functions of the department ;
ii. Reduction in exemptions, deductions, reliefs, rebates etc.
The history of taxation dates back to time immemorial and it is not a recent development by any
account. A thorough research on the history of taxation system shows that taxes were levied on either
on the sale and purchase of merchandise or livestock. 

Further, the history of taxation suggests that the process of levying and the manner of tax collection
were unorganized. But it suggests that all historical leaders and head countrymen collected taxes to
run its authority. In other words taxes on income, sale, purchase and properties were collected to run
the ruling Government machineries. Further, these taxes were collected to meet their military and civil
expenditure and also to meet the common needs of the subjects like maintenance of roads, drainage
system, government buildings, administration of justice and other functions of the region. day India
tax machinery is very much based on that laid down foundation. 

Although, there were no homogeneous tax rate structures but it depended on the production capacity
and commodity of that particular country and/or region. Moreover, the tax rates and quantum varied
according to the annual production. These taxes were collected in cash or in kind and it entirely
depended on the type of commodity or service on which it was levied upon. For example, there was a
very common practice of selling food crops and cash crops to government machineries against no

13
money. The history of taxation suggests these were done to store government buffer stocks to meet
emergencies. Taxes were levied on all classes of citizens, like actors, dancers, singers and even
dancing girls. Taxes were paid in the form of gold-coins, cattle, grains, raw-materials and even by
rendering personal service. 

In India, the tradition of taxation has been in force from ancient times. It finds its references in many
ancient books like 'Manu Smriti' and 'Arthasastra'. There was a perfect admixture of direct taxes with
indirect taxes and they were varied in nature. India's history of taxation suggests existence of a large
and composite taxable population. With the advent of the moguls in India the country witnessed a sea
of change in the taxation system of India. Although, they also practiced the same norm of taxation but
it was more homogeneous in structure and collection. The period of British rule in India witnessed
some remarkable change in the whole taxation system of India. Although, it was highly in favor of the
British government and its exchequer but it incorporated modern and scientific method of taxation
tools and systems. In 1922, the country witnessed a paradigm shift in the overall Indian taxation
system. Setting up of administrative system and taxation system was first done in the history of
taxation system in India. The period thereafter witnessed rapid growth and modernization of the
Indian taxation system and the present 

The main purpose of taxation is to accumulate funds for the functioning of the government
machineries. No government in the world can run its administrative office without funds and it has no
such system incorporated in itself to generate profit from its functioning. 

In other words, a government can run its administrative set up only through public funding which is
collected in the form of tax. Therefore, it can be well understood that the purpose of taxation is very
simple and obvious for proper functioning of a state. Taxes are charges levied against a citizen's
personal income or on property or for some specified activity. 

Further, the other important purposes of taxation are as follows - 

 Increase in effectiveness and productivity of the nation

 Increase in the quantum of revenue collection
 Improvement in services of the government
 Improve employment at all industry verticals
 Induction of modern technology in to the system
 Rationalization of terms and condition of the economic system
 Rationalization of employment terms and conditions

There are basically two types of taxes, like -

 Direct tax
 Indirect tax

Further, it is sub-divide into major groups like -

 Income tax

14
 Wealth tax
 Gift tax
 Expenditure tax
 Interest tax

The present day tax structure of India finds its root in the first draft of Indian taxation system, which
was incorporated in 1922. The first draft was amended a number of time according to the economic
policy requirements. The main acts and rules that governs the main purpose of taxation in India is the
income tax acts and rules, which are as follows - 

Acts

 Finance Act, 2007- An Act to give effect to the financial proposals of the Central
Government for the financial year 2007-2008
 National Tax Tribunal (Amendment) Act, 2007 - An Act to amend the National Tax
Tribunal Act, 2005
 Taxation Laws (Amendment) Act, 2006 - An Act further to amend the Income-tax Act,
1961, the Customs Act, 1962, the Customs Tariff Act, 1975 and the Central Excise Act, 1944
 Finance Act, 2006 - An Act to give effect to the financial proposals of the Central
Government for the financial year 2006-2007
 Taxation Laws (Amendment) Act, 2005 - An Act further to amend the Income-tax Act,
1961 and the Finance Act, 2005
 National Tax Tribunal Act, 2005 - An Act to provide for the adjudication by the National
Tax Tribunal of disputes with respect to levy, assessment, collection and enforcement of
direct taxes and also to provide for the adjudication by that Tribunal of disputes with respect
to the determination of the rates of duties of customs and central excise on goods and the
valuation of goods for the purposes of assessment of such duties as well as in matters relating
to levy of tax on service, in pursuance of article 323B of the Constitution and for matters
connected therewith or incidental thereto
 Finance Act, 2005 - An Act to give effect to the financial proposals of the Central
Government for the financial year 2005-2006
 Maharashtra Fiscal Responsibility and Budgetary Management Act, 2005- An Act to
provide for the responsibility of the State Government to ensure inter-generational equity in
fiscal management, fiscal stability
 Finance (No. 2) Act, 2004- The following Act of Parliament received the assent of the
President on the 10th September, 2004, and is hereby published for general information:- An
Act to give effect to the financial proposals of the Central Government for the financial year
2004-2005
 Finance Act, 2004- An Act to continue for the financial year 2004-05 the existing rates of
income-tax and the levy of the National Calamity Contingent Duty and the National Calamity
Contingent Duty of Customs on certain items

15
Taxation rules in India:

 Income-tax (Fourteenth Amendment) Rules, 2007- In exercise of the powers conferred by

section 295 read with sub-section (2) of section 17 of the Income-tax Act, 1961 (43 of 1961)
 Income-tax (Thirteenth Amendment) Rules, 2007
 Income-tax (Twelfth Amendment) Rules, 2007
 Income-tax (Eleventh Amendment) Rules, 2007
 Income-tax (Ninth Amendment) Rules, 2007
 Income-tax Welfare Fund Rules, 2007
 Wealth-tax (First Amendment) Rules, 2007
 Post Office (Monthly Income Accounts) (Amendment) Rules, 2007
 Directorate of Income-tax (Systems), Joint Director (Systems), Deputy Director
(Systems) and Assistant Director (Systems) Recruitment (Amendment) Rules, 2007
 Income-tax (Eighth Amendment) Rules, 2007

Tax Avoidance means the tax regime's legal use for one's own personal advantage so as to lessen the
tax amount that is payable to the government by ways that are legal. The Avoidance of Tax is usually
done by the people who desire to keep their money with themselves and not give it to the
government. 

Avoidance Tax includes situations when people eliminate or reduce tax by following a transaction or
many transactions that are legal. The income tax department provides many provisions through which
the people can go for Tax Avoidance such as refunds, credits, benefits, and many other kinds of
entitlements. The various methods of Tax Avoidance are:

 Legal entities
 Country of residence
 Double taxation

Legal entities are a method that people follow when they want to go for Tax Avoidance. Under this
method of Avoidance Tax, people legally defer paying personal taxes by creating a legal separate
entity to which they donate their property. The legal separate entity that is set up is often a foundation,
company, or trust. The properties are transferred to the trust or company, as a result of which the
income that is earned belongs to this entity and not by the owner. Usually, people are taxed personally
on earnings and property that they own and thus by transferring property to a legal separate entity,
individuals can avoid personal taxation although certain taxes such as corporate taxes are still
applicable. In order to go for Tax Avoidance, the foundation, company, or trust can also avoid
corporate taxes if the entity is set up in a jurisdiction that considered offshore. 

Country of residence is another method that people adopt when they go for Avoidance of Tax. Under
this method of Tax Avoidance, the company or person changes the tax residence to a place that is a
tax haven in order to lower the amount of taxes that they pay. Under this method, the person may also
become a regular traveler so that taxation can be avoided. Double taxation means that many countries

16
charge taxes on the income that has been earned inside that country without taking into consideration,
the resident country of the firm or person. So that people do not have to pay double taxes, once in the
country where the income has been earned and then again in the resident country, many countries
have gone for bilateral treaties of double taxation with other countries. This helps tax-payers as they
are able to avoid paying double taxes. 

Tax Avoidance reduces the revenue of the government and also brings into disrepute, the tax system.
Ideally, Avoidance of Tax should not be encouraged and the government should also take measures in
order to prevent it.

Tax Evasion entails the efforts that are made by trusts, individuals, firms, and various other entities to
avoid paying taxes by illegal and unfair means. The Evasion of Tax usually takes place when
taxpayers deliberately hide their incomes from the tax authorities in order to reduce their liability of
tax. 

Evasion Tax takes place when the people report dishonest tax that includes declaring less gains,
profits, or income than what has been actually earned and they even go for overstating deductions.
The Evasion of Tax level depends on certain factors such as fiscal equation which means that people's
tendency to pay less tax declines when the payment due from taxes becomes obvious. The level of
Tax Evasion is also dependent on the tax administration's efficiency and corruption levels. 

The level of Evasion Tax also depends on the chartered accountants and tax lawyers who help
companies, firms, and individuals evade paying taxes. Tax Evasion is a crime in all major countries
and the guilty parties are subjected to imprisonment and fines. The various methods of Tax Evasion
are:

 Smuggling
 Customs duty evasion
 Value added tax evasion
 Illegal income tax evasion

Smuggling is a method of Tax Evasion, following which people export or import foreign goods
through routes that are unauthorized. People resort to smuggling for they want to avoid paying total
customs duties that are chargeable and also when they want to import items that are contraband.
Customs duty evasion is another method of Tax Evasion under which the importers evade paying
customs duty by false declarations of the description of the product and quantity. The importers in
order to evade paying customs duty also resort to under-invoicing. 

Principles of Taxation in Ancient India

As defined in Wikipedia Dictionary taxes are ‘compulsory charges levied by a government for the
purpose of financing services performed for the common benefit'. In the words of Mill, taxation is
"the condition of the existence of governments"(Principles of Political Economy). There is no denying
the fact that no government can function without incurring a considerable expense on governance and
welfare of its people. And for this people's contributions in the form of taxes are the foremost

17
components of financial resources to the government. This position is not confined to modern days'
governments alone but existed throughout the ages, ancient and medieval; rather its existence may be
traced back to the evolution of mankind into political organization. The ancient India was no
exception to this. There is no dearth of evidence in the form of references and inferences in the
documents of this period. The Vedic texts, epics, smritis, puranas, Arthashatra, literary texts and
epigraphs of the time, all equivocally dwell at great length about the paramount importance of taxes to
governments. Starting with the Vedic period, there existed a regular system of taxation. The technical
fiscal terms like ‘bali', ‘shulka','bhaga',‘udaja', and ‘niraja' are frequently mentioned in the literature
of this period1 which reasonably and legitimately lend support to the view that taxation had evolved
from voluntary to compulsory and regular in nature. The Rigvedic king was the ‘sole taker' of taxes
and even did not hesitate in using force to realize the state's dues fallen in arrears2. The Atharvaveda
refers to the state's share ‘in village, in horses and in kine (cows)3'. However, it is not known what
share the state had in the wealth of its people. It appears that in course of time during the Vedic period
itself, taxation started affecting life of the people so much so that a tendency to escape from taxes
started gaining ground among influential people of the society. The Brahmanas were the first to claim
immunity from taxes possibly on the basis of being engaged in unproductive vocations4. However,
the simple nature of Vedic taxation did not last long as it was no longer adequate to meet the growing
needs of government arising out from sweeping economic, social and political developments that had
taken place during the post Vedic period of Indian history. This gave birth to a number of general
rules or canons of taxation.
 
Modern scholars on ancient Indian polity hold the principles of Hindu Taxation in high esteem. "That
the constitutional law of taxation was a living law, regulating life". Whatever the form of government
there was, taxation was not an object of ruler's caprice5. Some of the scholars go to the extent of
asserting that the modern maxim of ‘ability to pay taxes' and ‘the least sacrifice theory' were the
guiding principles in ancient India6. The historical accounts, however, do not subscribe to the
eloquent estimates of these scholars as it would be evident from the critical examination of data
available in the various texts of the period under review.
 
The first principle of modern taxation is that it is compulsory in nature. In ancient Indian texts, there
are abundant evidences to show that taxes as compulsory payments were well cherished and
cultivated. Manu Smriti prescribes taxes to all and sundry. ‘Even a poor man who maintained himself
by following some occupation, was required to contribute every year something by way
of Kara (tax), while workers like cooks, artisans like blacksmiths, shudras who subsist by manual
labour were required to work for the state one day in a month7.
Kautilya goes a step a further and did not spare even a hermit who were required to pay taxes from the
Corus they had collected8. This system seems to have prevailed even during the Gupta period of
Indian history as is revealed from Kalidasa's Sakuntalam and Raghuvamsa. ‘The hermits too provided
the king with a sixth part of the grains they gleaned thinking that it was a tax payable to him who
protected them'9. However, the system of taxing all ushered into a little
 
change later on which is evident from the writings of Lakshmidhara, a minister under Gahadavalas.
He says that "everyone must contribute (taxes) to the extent of potential capacity". He adds further
that "he, who has no resources, should not be asked to pay taxes"10.
 
The king in ancient India is repeatedly exhorted in the literature of this period to respect the sacred
laws as prescribed in the Holy Scriptures while levying taxes. The great epic, Mahabharata opines that
"taxing according to reason is a means to preservation". The king should fill his treasury "with a sixth
part upon a fair calculation of the yield of the soil as his tribute with other fines and forfeitures levied
upon offenders11. An identical view is held by very many other law-givers of the time. Vasistha, for
instance, recommends the payment of taxes only when the king rules in accordance with the sacred
laws12. Manu holds that the king should cause the annual revenue being collected by trustworthy
officials and in matters of taxation he should obey the sacred laws and behave like a father to his
subjects13. Apastamba, another law-giver asks the king to collect only lawful taxes14. The frequent

18
reference to ‘lawful taxes' has led many scholars to conclude that this was akin to modern principle of
taxing according to law. They hold that taxes were fixed by the sacred laws and king had no authority
to impose any new levy nor could he enhance the old one. K.P. Jayaswal, in his ‘Hindu Polity' holds
that "the constitutional law of taxation was a living law regulating life… they have been fixed by law
and the scales had been embodied in the sacred common law. The consequence was that whatever the
form of government, the matter of taxation was not an object of ruler's caprice"15. Jayaswal was
followed by B.A. Saletore, who holds that "taxation was not a matter of either chance or caprice on
the part of the monarch….the action of the king was circumscribed by the regulations laid down in the
Dharmasastras"16. Another scholar, Balkrishna also strongly believes that ‘the abuse of arbitrary
taxation was reduced to minimal by not allowing the king to levy any tax that was not sanctioned by
the Vedic and Smriti laws or custom'17. It appears that these scholars have been swayed more by
emotions than by the motives behind mention of sacred laws by ancient Hindu thinkers in regard to
taxation. The frequent reference to sacred laws in their writings imply that only such taxes, which
were specified by the state, were to be collected by the authorities. Nowhere in the above statements is
it mentioned that taxes were fixed by the sacred texts. It is only Vasistha who has advocated that if the
king did not rule in accordance with the sacred laws taxes should not be paid to him but even he does
not say that taxes were fixed and articles to be taxed were decided for ever. Reference to ‘lawful
taxes' as prescribed by sacred scriptures was only a reminder or notice to the state / king against being
oppressive in levying and collecting taxes. Therefore, too much is not to be read of the word, ‘lawful
taxes' as assumed by the above mentioned scholars. Further, it is a well known fact that right to tax
and to impart righteous or unrighteous government always rested with the sovereign of the state. It
was because in the sovereign alone vested the power to wield the sceptre of danda. Besides, it is also
not proper to assume that the literature of this period refer to all taxes current during their time. The
data supplied by them is meagre and scanty and moreover, it is seldom that they give a uniformity of
thought and system. During the period under review a number of sacred texts came into existence but
it is not clear which of the text worked as a guide to the king. In fact, there was no universal fiscal law
applicable to all condition and all times. The state could freely and conveniently alter the existing
rules so as to suit the purpose and adequately meet the need of the occasion. In view of these facts, the
contention of these scholars that ‘taxes were fixed by sacred texts', does not come out unscathed and
is in fact reduced to mere fallacy.
 
The next canon of taxation as envisaged by ancient thinkers is that taxes should be moderate and not
burdensome on its subjects. Manu opines that the king should "always fix in his realm the duties and
taxes in such a manner that he, himself and the man who does the work receive their due reward"18.
He continues that "as the leach, the calf and the bee take their food little by little, even so must the
king draw from his realm moderate annual taxes"19. Kulluka, in his commentary on Manu states that
taxes should be realised from "what is in excess of the capital (mooladhanamanuchchhindata)"20.
Based on the above texts, Saletore believes that income and not the capital should be taxed. The leach,
the suckling calf and the bee do not destroy the very source while taking their food21. Manu's view is
elucidated in the Arthasastra of Kautilya. "Just as fruits are gathered from garden as often as they
become ripe, so revenue should be collected as often as they become ripe"22. Manu and Kautilya thus
recommend for continuous levy but at the same time they also caution that if this maxim is
indiscriminately applied it would result in financial suicide. Perhaps because of this fear Manu seems
to have offered a supplementary to his previous text. He warns the king that he should not cut his own
root by not levying any tax or the root of other (men) by excessive greed, because by cutting his own
root or theirs he makes himself and them wretched23. He has offered his sober advice to the king that
he should not take what ought not to be taken nor even though he is affluent, should he forego his just
dues be they were so small24. Like Manu, Kautilya too has advised that ‘collection of revenue or of
fruits when unripe was bound to sap the very source of production and to bring about an immense
peril to the state25.
 
The fear of injuring the source and the sober advice to state to collect moderate taxes and that too in
easy instalments  have been advocated in very many other texts as well. Here also the precepts are
loaded with picturesque similes and metaphors. The Udyogaparva of Mahabharata opines that ‘just as

19
a bee draws honey but at the same time leaves the flower uninjured, similarly the king should tax his
subjects without harming them. He should act like a bee and garland maker and not like charcoal
maker26. The analogy of bee drawing honey little by little occurs in the Santiparva and elsewhere as
well. The king is advised not to bruise the udders as the calf does not. He should suck his kingdom in
the fashion of a leach taking blood mildly, a tigress carrying her cubs touching them with her teeth, in
the fashion of a mouse which though having sharp teeth produces a gentle rocking of the feet when
biting a sleeping person27.  The text elaborates it further. It states that an intelligent king should milk
his kingdom on the analogy of the calf. If the calf is permitted to suck, it grows strong and carries
heavy loads. If, on the other hand, the cow is milked too much the calf becomes weak and incapable
of being useful to its owner. Similarly, if the kingdom is taxed recklessly, the whole economy of the
state will be paralysed'28. ‘Just as a person wishing for milk does not obtain by cutting the udders of
the cow, so a king, who resorts to unreasonable taxes, saps the very incentive for production. The
subjects, when properly looked, yield grain and cash to the state as gratified mother yields milk to her
child'29.
 
The simile of taxing the kingdom and milking the cow repeatedly occurs in the classics and other
authoritative works as well30. The tradition is maintained even in the late works on polity. The
Pancatantra enjoins that the gardener plucks fruits and flowers but does not harm the trees; the bee
sucks honey but does not damage the flower, in the same way the king should collect his taxes
without causing any hardship to his subjects31. The text further states that one, who kills the goat, can
at best get one meal but one who feeds it well, can get milk for several years31.
 
It would be observed that the foregoing canons of taxation conceived and advocated by the Hindu
lawgivers lays an emphasis on the principle of continuous levy to be realised little by little (Alpalpa).
But these small doses of taxes were sure to suck the people dry in the manner in which leaches, calves
and bees help themselves upon their food. ‘Taxes, more taxes, still more taxes' appears to be the
slogan of Hindu fiscal thoughts32. However, Hindu thinkers had visualised the inherent danger of its
abuse and therefore, they came up with a sober advice to the king. ‘Under no circumstances, the
capital, which formed the sole basis of one’s' productive power, was to be taxed'. It was only the net
income to be taxed as often as it was derived. The principle of taxing only income and not capital is
undoubtedly laudable and salutary but the reality check reveals that it was the state which enjoyed the
major portion of people's income. The historical data of the period show that at least with the start of
the imperial history of ancient India, the people paid three types of taxes, viz. the central, the
provincial and local, each one of these with many other minor cesses. People very often used to suffer
which is evident from frequent references to oppressive and arbitrary taxes resulting in people leaving
their profession and migrating to other places33.
 
The Buddhist literatures also echo identical sentiments about levying taxes. The Divyavadana
mentions as how the two good ministers of a king admonished him by cautioning that the kingdoms
‘are like the flowers and plants and fruit trees which if nourished properly , yield flowers and fruits at
the proper time so the kingdom being protected yields taxes and revenue"34  .On the other hand the
two evil ministers who immediately succeeded to the office of good ones, advised the king that just as
sesame "does not oil unless it is made to try, turn to pieces, oppressed and pressed , so also is the
kingdom'35. These two varied statements show that the nature of taxes entirely depended on the sweet
will of the sovereign of the state.
Canons of taxation in analogical form occur in Tamil literature as well. In the Purram it is observed
that even if the land is less than a ma, one could make a ball of dried paddy and continue to feed it to
an elephant every day for a long time however, on the other hand even if the land is big and the
elephant is allowed to eat at its will, the amount of damage caused in trampling will be enormous and
much more than what it would normally consume. Similarly, if an intelligent king levies moderate and
equitable taxes, his treasury would grow a thousand fold and he himself shall get recognition and
fame. If he lacks in wisdom and is surrounded by evil officers and taxes his subjects recklessly like
the elephant that enters the paddy store, he earns ire of all and ultimately brings the state to ruin and is
despised36. The Kural compares a king who asks his subjects to pay taxes more than what is due, to a

20
high way robber with sword in his hand asking a lonely traveller to surrender all his possessions37.
These analogies evidently refer to moderate taxes and of untoward consequences of oppressive taxes.
They also refer to fixed usual revenue. The validity of these statements are, however, suspect as it is
south India where we find taxes most unusual and heavy38. Kural's statement refers to the collection
of taxes and advises the king not to let his greed play with the people's hard earned fruits of their
labour.
 
The next principle of taxation as prescribed in ancient Indian scriptures is that if at all an increase in
taxation is inevitable; it has to be gradual and not sudden and steep. The Mahabharata opines that little
by little money should be extracted from prosperous subjects. The king should increase the burden of
his subjects by and by like a person gradually increasing the load of a young bullock38. Kautilya also
favours a gradual increase in taxes39. The sentiment is also echoed by Kamandaka. His advice to the
king is that the subjects are like a delicate seed-shot , if properly nourished and cared for , it yields
ample harvest in due time ,  so is the subjects of a state. Just as a cow is at one time tended and
nourished and at other time milked, so are the subjects. A florist both tends and sprinkles water on his
plants and culls flowers from them40.
 
In regard to trade and industry, by and large ancient texts favours taxing only the net income after
taking into account purchase price and other expenses. The Mahabharata advises the king to "fix rules
of taxation on traders after having considered their sale and purchase and expenses on the way"41.
Manu also holds an identical view when he says that the king should take taxes from the merchants on
their articles after proper enquiry about the sale and purchase price, the distance over which they have
been brought, the expenses on the way of carriage and for safe guarding them from thieves and
robbers and calculation of profit on total expenses42. Based on the above versions of ancient texts,
U.N. Ghoshal rightly concludes that "this rule undoubtedly shows an appreciation of the difficulties
attending the assessment of the merchants' profit and indicates an attempt to throw the burden of
taxation upon the net profit instead of charging the same upon the capital"43. This, Ghoshal compares
with Sismondi's first principle of taxation, viz: ‘that every tax should fall upon the revenue and not
upon the capital44. Lakshmidhara, a minister with Gahadwalas also prescribes that taxes were to be
based on certain primary considerations, e.g. the cost of establishment, maintenance charges and the
cost of safe guarding the merchandise before the rates of taxes were fixed45. Further in this regard,
Kautilya and Shukra advocate that taxes on commodities were to be realised only once46.
In the case of artisans, the Mahabharata advises the king that before taxing them , he should take into
consideration the labour and skill involved and necessities of day today life required by them47.
 
The foregoing inferences to canons of taxation in Ancient India reveal certain maxims. The first and
foremost is that  taxation was compulsory and each individual was required to contribute to the state
revenue or render service in lieu of taxes in proportion to his ability. This compares to some extent
with the first canon of Adam Smith, i.e. "the subjects of every state ought to contribute towards the
support of the government as nearly as possible, in the proportion to their respective abilities; that is
in proportion to the revenue which they respectively enjoy under the protection of the
state"48.However, there is a little difference between the principle of taxation of Adam Smith and that
advocated by the Hindu law-givers. According to Adam smith, if a person does not earn anything, he
is not required to pay any tax but in the fiscal system of ancient India even a smallest income was to
be taxed and even if a person did not earn anything, he was required to contribute to the state in the
form of labour49. Nevertheless, instances of social order and individual status of a person playing role
in the system of taxation in ancient India are also not wanting.  During the Vedic time and even later,
people belonging to Bramhmana class have been found asserting that since they were engaged in
unproductive vocation like imparting education and performing  religious rituals, they should not be
asked to pay taxes like others. Kautilya in his Arthashastra further elaborates the element of certainty
in Hindu tax – system. According to him the taxes had to be certain and made known to the tax
payers, the amount of tax, articles to be taxed and the time to pay otherwise the tax collectors could
realise more than what is prescribed and appropriate a part of collection for their own benefit.50. 
Kautilya has gone to the extent of prescribing punishment to such erring officials51. This maxim of

21
certainty in the Hindu fiscal thoughts appears close to the second canon of Adam Smith, i.e. "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 quality to be paid, ought all to be clear and plain to the contributor and to
every other person"52.
 
The next emphasis, the Hindu canons lay on, is that taxes should be collected at a time and place most
suited for the tax payers. Most of the analogies relating to taxes and which have been discussed above
do focus on the element of convenience. This maxim is very akin to Adam Smith's third canon, i.e.
"every tax ought to be levied at the time and manner which is most likely to be convenient for the
contributor to pay it"53.
 
The next maxim of Hindu taxation emphasises that a reasonable margin should always be left with the
state exchequer after meeting the cost of tax collection. It appears that Kautilya was well seized of the
reality and accordingly shaped his fiscal policy during the Mauryan period of Indian history. He
advises the king in his Arthashastra to appoint trustworthy tax officials for collection purposes. He has
gone to the extent of prescribing punishment to those tax collectors who were found indulged in
siphoning state revenue54. This element of certainty in Hindu tax system compares to great extent
with Adam Smith's fourth and the last canon of taxation: "every tax ought to be so contrived as both
to take out and to keep out of the pockets of the people as little as possible over and above what it
brings into the public treasury of the state"55. The other aspect of the principle of economy, i.e.
‘production and consumption should not be hampered', seems to be the guiding factor to Hindu
thinkers on fiscal thoughts56.
 
Undoubtedly, the system of taxation as advocated by the Hindu thinkers is full of eloquent metaphors
and similes. Let us pause for a while and examine, if the canons of taxation were in effect, in reality,
as eloquent as they have been made in the scriptures? Can there be any comparison drawn with the
modern theory of taxation?  The fact is that there cannot be a rigid and accurate comparison of the
Hindu canons. Only inferences to the extent of gist can be observed in almost all the sacred sayings of
the Hindu law-givers. Thus, Mahabharata prescribes heavy taxation on the rich who enjoys maximum
protection of the state57.  This, however, meets to some extent Adam Smith's first canon, i.e. ‘ability
to pay tax' but not the theory of progression. Some scholars find in Manu (ancient law-giver) that
taxes were levied on income and not on capital and this they compare with the doctrine of progressive
taxation58. But taxing income does not necessarily amount to increasing rate of taxes with the
increase in income. However, the nearest similarity with the progressive taxation is seen in Medhatithi
on Manu VII-128 who, in his commentary, states that there is no rule for fixing the taxes in the case
of merchants' profits and that where the profits are large, a higher rate may be applied59.
 
Sometimes, despite the canons of taxation sounding very high, quite opposites also happened and
people suffered due to arbitrary and oppressive taxes. Jatakas and other sources of information like
inscriptions and literary texts of the time shed light on how the subjects fled from their home to
escape from tax collectors. However, this aspect of taxation, i.e. oppressive taxation, is out of the
ambit of the present research paper and is proposed to be dealt in other article.  For the present, it is
suffice to conclude that the guiding principle before the fiscal thinkers in ancient India was that "it is
not the heavily taxed realm which executes great deeds but the moderately taxed one"60. Though the
Hindu canons are embedded with beautiful metaphors and similes and carried with them high
ambitions and pious plans but in effect they were more in the nature of holy precepts than actually
followed by the sovereign in his realm. In view of the real position and pious thoughts found moving
not always together it is difficult to agree with those scholars who hold that "Hindu theory avoided the
vulgar fallacy which looks upon taxation"61. Nevertheless the possibility of curbing such a tendency
is not at all ruled out.
 
To sum up, the principles of taxation mentioned in the ancient Hindu texts do not necessarily deal
with the tax policy of the governments of the time nor did the state treat them as must considerations
in evolving its fiscal policy. The canons of taxation, variously expressed and advocated in the sacred

22
texts are indeed one and the same. They are simply a modification of one and other and move round
the only theme i.e. the king should not resort to arbitrary and oppressive taxes. Most of the canons are
applicable only in the work of collection and not in the decision of making a policy.
 

Taxation levels

Egyptian peasants seized for non-payment of taxes. (Pyramid Age)

The first known system of taxation was in Ancient Egypt around 3000 BC - 2800 BC in the first
dynasty of the Old Kingdom. Records from the time document that the pharaoh would conduct a
biennial tour of the kingdom, collecting tax revenues from the people. Other records are granary
receipts on limestone and papyrus. Early taxation is also described in the Bible. In Genesis (chapter
47, verse 24 - the New International Version), it states "But when the crop comes in, give a fifth of it
to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and
your households and your children". Joseph was telling the people of Egypt how to divide their crop,
providing a portion to the Pharaoh. A share (20%) of the crop was the tax.

Later, in the Persian Empire, a regulated and sustainable tax system was introduced by Darius I the
Great in 500 BC;the Persian system of taxation was tailored to each Satrapy (the area ruled by a
Satrap or provincial governor). At differing times, there were between 20 and 30 Satrapies in the
Empire and each was assessed according to its supposed productivity. It was the responsibility of the
Satrap to collect the due amount and to send it to the emperor, after deducting his expenses (the
expenses and the power of deciding precisely how and from whom to raise the money in the province,
offer maximum opportunity for rich pickings). The quantities demanded from the various provinces
gave a vivid picture of their economic potential. For instance, Babylon was assessed for the highest
amount and for a startling mixture of commodities; 1,000 silver talents and four months supply of
food for the army. India, a province fabled for its gold, was to supply gold dust equal in value to the
very large amount of 4,680 silver talents. Egypt was known for the wealth of its crops; it was to be the
granary of the Persian Empire (and, later, of the Roman Empire) and was required to provide 120,000
measures of grain in addition to 700 talents of silver. This was exclusively a tax levied on subject
peoples. Persians and Medes paid no tax, but, they were liable at any time to serve in the army.

In India, Islamic rulers imposed jizya (a poll tax on non-Muslims) starting in the 11th century. It was
abolished by Akbar.

23
Numerous records of government tax collection in Europe since at least the 17th century are still
available today. But taxation levels are hard to compare to the size and flow of the economy since
production numbers are not as readily available, however. Government expenditures and revenue in
France during the 17th century went from about 24.30 million livres in 1600-10 to about 126.86
millionlivres in 1650-59 to about 117.99 million livres in 1700-10 when government debt had reached
1.6 billion livres. In 1780–89, it reached 421.50 million livres. Taxation as a percentage of production
of final goods may have reached 15%–20% during the 17th century in places such as France, the
Netherlands, and Scandinavia. During the war-filled years of the eighteenth and early nineteenth
century, tax rates in Europe increased dramatically as war became more expensive and governments
became more centralized and adept at gathering taxes. This increase was greatest in England, Peter
Mathias and Patrick O'Brien found that the tax burden increased by 85% over this period. Another
study confirmed this number, finding that per capita tax revenues had grown almost six fold over the
eighteenth century, but that steady economic growth had made the real burden on each individual only
double over this period before the industrial revolution. Average tax rates were higher in Britain than
France the years before the French Revolution, twice in per capita income comparison, but they were
mostly placed on international trade. In France, taxes were lower but the burden was mainly on
landowners, individuals, and internal trade and thus created far more resentment.

Taxation as a percentage of GDP in 2003 was 56.1% in Denmark, 54.5% in France, 49.0% in
the Euroarea, 42.6% in the United Kingdom, 35.7% in the United States, 35.2% in Ireland, and among
all OECD members an average of 40.7%.

To tax (from the Latin taxo; "I estimate") is to impose a financial charge or other levy upon
a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that
failure to pay is punishable by law.

Taxes are also imposed by many subnational entities. Taxes consist of direct tax or indirect tax, and
may be paid in money or as its labour equivalent (often but not always unpaid labour). A tax may be
defined as a "pecuniary burden laid upon individuals or property owners to support the government a
payment exacted by legislative authority." A tax "is not a voluntary payment or donation, but an
enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by
government whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise,
subsidy, aid, supply, or other name."

The legal definition and the economic definition of taxes differ in that economists do not consider
many transfers to governments to be taxes. For example, some transfers to the public sector are
comparable to prices. Examples include tuition at public universities and fees for utilities provided by
local governments. Governments also obtain resources by creating money (e.g., printing bills and
minting coins), through voluntary gifts (e.g., contributions to public universities and museums), by
imposing penalties (e.g., traffic fines), by borrowing, and by confiscating wealth. From the view of

24
economists, a tax is a non-penal, yet compulsory transfer of resources from the private to the public
sector levied on a basis of predetermined criteria and without reference to specific benefit received.

In modern taxation systems, taxes are levied in money; but, in-kind and corvée taxation are

characteristic of traditional or pre-capitalist states and their functional equivalents. The method of
taxation and the government expenditure of taxes raised is often highly debated in politics and
economics. Tax collection is performed by a government agency such as Canada Revenue Agency,
the Internal Revenue Service (IRS) in the United States, or Her Majesty's Revenue and
Customs(HMRC) in the UK. When taxes are not fully paid, civil penalties (such as fines or forfeiture)
or criminal penalties (such as incarceration) may be imposed on the non-paying entity or individual.

Purposes and effects

Money provided by taxation has been used by states and their functional equivalents throughout
history to carry out many functions. Some of these include expenditures on war, the enforcement of
law and public order, protection of property, economic infrastructure (roads, legal tender, enforcement
of contracts, etc.), public works, social engineering, and the operation of government itself.
Governments also use taxes to fund welfare and public services. These services can include
education, health care systems, and pensions for the elderly, unemployment benefits, and
public. Energy, water and waste management systems are also common public utilities. Colonial and
modernizing states have also used cash taxes to draw or force reluctant subsistence producers into
cash economies.

Governments use different kinds of taxes and vary the tax rates. This is done to distribute the tax
burden among individuals or classes of the population involved in taxable activities, such as business,
or to redistribute resources between individuals or classes in the population. Historically,
the nobility were supported by taxes on the poor; modern social security systems are intended to
support the poor, the disabled, or the retired by taxes on those who are still working. In addition, taxes
are applied to fund foreign aid and military ventures, to influence the macroeconomic performance of
the economy (the government's strategy for doing this is called its fiscal policy; see also tax
exemption), or to modify patterns of consumption or employment within an economy, by making
some classes of transaction more or less attractive.

A nation's tax system is often a reflection of its communal values or/and the values of those in power.
To create a system of taxation, a nation must make choices regarding the distribution of the tax
burden—who will pay taxes and how much they will pay—and how the taxes collected will be spent.
In democratic nations where the public elects those in charge of establishing the tax system, these
choices reflect the type of community that the public and/or government wishes to create. In countries
where the public does not have a significant amount of influence over the system of taxation, that
system may be more of a reflection on the values of those in power.

25
All large businesses incur administrative costs in the process of delivering revenue collected from
customers to the suppliers of the goods or services being purchased. Taxation is no different; the
resource collected from the public through taxation is always greater than the amount which can be
used by the government. The difference is called compliance cost, and includes for example the
labour cost and other expenses incurred in complying with tax laws and rules. The collection of a tax
in order to spend it on a specified purpose, for example collecting a tax on alcohol to pay directly for
alcoholism rehabilitation centers, is called hypothecation. This practice is often disliked by finance
ministers, since it reduces their freedom of action. Some economic theorists consider the concept to be
intellectually dishonest since, in reality, money is fungible. Furthermore, it often happens that taxes or
excises initially levied to fund some specific government programs are then later diverted to the
government general fund. In some cases, such taxes are collected in fundamentally inefficient ways,
for example highway tolls, this is also true of privately funded roads.

Some economists, especially neo-classical economists, argue that all taxation creates market

distortion and results in economic inefficiency. They have therefore sought to identify the kind of tax
system that would minimize this distortion. Also, one of every government's most fundamental duties
is to administer possession and use of land in the geographic area over which it is sovereign, and it is
considered economically efficient for government to recover for public purposes the additional value
it creates by providing this unique service.

Since governments also resolve commercial disputes, especially in countries with common law,
similar arguments are sometimes used to justify a sales tax or value added tax. Others (e.g.
libertarians) argue that most or all forms of taxes are immoral due to their involuntary (and therefore
eventually coercive/violent) nature. The most extreme anti-tax view is anarcho-capitalism, in which
the provision of all social services should be voluntarily bought by the person(s) using them.

The Four "R"s

Taxation has four main purposes or effects: Revenue, Redistribution, Repricing, and Representation.
The main purpose is revenue: taxes raise money to spend on armies, roads, schools and hospitals, and
on more indirect government functions like market regulation or legal systems.

1. A second is redistribution. Normally, this means transferring wealth from the richer sections
of society to poorer sections.
2. A third purpose of taxation is repricing. Taxes are levied to address externalities; for example,
tobacco is taxed to discourage smoking, and a carbon tax discourages use of carbon-based
fuels.
3. A fourth, consequential effect of taxation in its historical setting has been representation. The
American revolutionary slogan "no taxation without representation" implied this: rulers tax
citizens, and citizens demand accountability from their rulers as the other part of this bargain.

26
 Studies have shown that direct taxation (such as income taxes) generates the greatest degree
of accountability and better governance, while indirect taxation tends to have smaller effects.
Proportional, progressive, and regressive

An important feature of tax systems is the percentage of the tax burden as it relates to income or
consumption. The terms progressive, regressive, and proportional are used to describe the way the rate
progresses from low to high, from high to low, or proportionally. The terms describe a distribution
effect, which can be applied to any type of tax system (income or consumption) that meets the
definition.

 A progressive tax is a tax imposed so that the effective tax rate increases as the amount to
which the rate is applied increases.
 The opposite of a progressive tax is a regressive tax, where the effective tax rate decreases as
the amount to which the rate is applied increases. This effect is commonly produced where means
testing is used to withdraw tax allowances or state benefits, creating high marginal tax rates. The
highest marginal tax rates are borne by those on the lowest incomes.
 In between is a proportional tax, where the effective tax rate is fixed, while the amount to
which the rate is applied increases.

The terms can also be used to apply meaning to the taxation of select consumption, such as a tax on
luxury goods and the exemption of basic necessities may be described as having progressive effects as
it increases a tax burden on high end consumption and decreases a tax burden on low end
consumption.

Direct and indirect

Taxes are sometimes referred to as "direct taxes" or "indirect taxes". The meaning of these terms can
vary in different contexts, which can sometimes lead to confusion. An economic definition, by
Atkinson, states that "...direct taxes may be adjusted to the individual characteristics of the taxpayer,
whereas indirect taxes are levied on transactions irrespective of the circumstances of buyer or seller."
(A. B. Atkinson, Optimal Taxation and the Direct Versus Indirect Tax Controversy, 10 Can. J. Econ.
590, 592 (1977)). According to this definition, for example, income tax is "direct", and sales tax is
"indirect". In law, the terms may have different meanings. In U.S. constitutional law, for instance,
direct taxes refer to poll taxes and property taxes, which are based on simple existence or ownership.
Indirect taxes are imposed on events, rights, privileges, and activities. Thus, a tax on the sale of
property would be considered an indirect tax, whereas the tax on simply owning the property itself
would be a direct tax. The distinction between direct and indirect taxation can be subtle but can be
important under the law.

Tax incidence

27
Diagram illustrating taxes effect

Law establishes from whom a tax is collected. In many countries, taxes are imposed on business (such
as corporate taxes or portions of payroll taxes). However, who ultimately pays the tax (the tax
"burden") is determined by the marketplace as taxes become embedded into production costs.
Depending on how quantities supplied and demanded vary with price (the "elasticities" of supply and
demand), a tax can be absorbed by the seller (in the form of lower pre-tax prices), or by the buyer (in
the form of higher post-tax prices). If the elasticity of supply is low, more of the tax will be paid by
the supplier. If the elasticity of demand is low, more will be paid by the customer; and, contrariwise
for the cases where those elasticities are high. If the seller is a competitive firm, the tax burden is
distributed over the factors of production depending on the elasticities thereof; this includes workers
(in the form of lower wages), capital investors (in the form of loss to shareholders), landowners (in
the form of lower rents), entrepreneurs (in the form of lower wages of superintendence) and
customers (in the form of higher prices).

To illustrate this relationship, suppose that the market price of a product is $1.00, and that a $0.50 tax
is imposed on the product that, by law, is to be collected from the seller. If the product has an elastic
demand, a greater portion of the tax will be absorbed by the seller. This is because goods with elastic
demand cause a large decline in quantity demanded for a small increase in price. Therefore in order to
stabilize sales, the seller absorbs more of the additional tax burden. For example, the seller might drop
the price of the product to $0.70 so that, after adding in the tax, the buyer pays a total of $1.20, or
$0.20 more than he did before the $0.50 tax was imposed. In this example, the buyer has paid $0.20 of
the $0.50 tax (in the form of a post-tax price) and the seller has paid the remaining $0.30 (in the form
of a lower pre-tax price).

Forms of taxation
In monetary economies prior to fiat banking, a critical form of taxation was seigniorage, the tax on the
creation of money.

Other obsolete forms of taxation include:

28
 Scutage, which is paid in lieu of military service; strictly speaking, it is a commutation of a
non-tax obligation rather than a tax as such but functioning as a tax in practice.
 Tallage, a tax on feudal dependents.
 Tithe, a tax-like payment (one tenth of one's earnings or agricultural produce), paid to the
Church (and thus too specific to be a tax in strict technical terms). This should not be confused
with the modern practice of the same name which is normally voluntary.
 (Feudal) aids, a type of tax or due that was paid by a vassal to his lord during feudal times.
 Danegeld, a medieval land tax originally raised to pay off raiding Danes and later used to
fund military expenditures.
 Carucage, a tax which replaced the Danegeld in England.
 Tax farming, the principle of assigning the responsibility for tax revenue collection to private
citizens or groups.

Tax rates

Taxes are most often levied as a percentage, called the tax rate. An important distinction when talking
about tax rates is to distinguish between the marginal rate and the effective (average) rate. The
effective rate is the total tax paid divided by the total amount the tax is paid on, while the marginal
rate is the rate paid on the next dollar of income earned. For example, if income is taxed on a formula
of 5% from $0 up to $50,000, 10% from $50,000 to $100,000, and 15% over $100,000,
a taxpayer with income of $175,000 would pay a total of $18,750 in taxes.

Tax calculation

(0.05*50,000) + (0.10*50,000) + (0.15*75,000) = 18,750

The "effective rate" would be 10.7%:

18,750/175,000 = 0.107
The "marginal rate" would be 15%.
Pigovian taxes

The existence of a tax can increase economic efficiency in some cases. If there is a negative

externality associated with a good, meaning that it has negative effects not felt by the consumer, then
a free market will trade too much of that good. By taxing the good, the government can increase
overall welfare as well as raising revenue. This type of tax is called a Pigovian tax, after
economistArthur Pigou.

Possible Pigovian taxes include those on polluting fuels (like petrol), taxes on goods which incur
public healthcare costs (such as alcohol or tobacco), and charges for existing 'free' public goods (like
congestion) are another possibility

Transparency and simplicity

29
Another concern is that the complicated tax codes of developed economies offer perverse economic
incentives. The more details of tax policy there are, the more opportunities for legal tax avoidance and
illegal tax evasion; these not only result in lost revenue, but involve additional deadweight costs: for
instance, payments made for tax advice are essentially deadweight costs because they add no wealth
to the economy. Perverse incentives also occur because of non-taxable 'hidden' transactions; for
instance, a sale from one company to another might be liable for sales tax, but if the same goods were
shipped from one branch of a corporation to another, no tax would be payable.

To address these issues, economists often suggest simple and transparent tax structures which avoid
providing loopholes. Sales tax, for instance, can be replaced with a value added tax which disregards
intermediate transactions.

Costs of compliance

Although governments must spend money on tax collection activities, some of the costs, particularly
for keeping records and filling out forms, are borne by businesses and by private individuals. These
are collectively called costs of compliance. More complex tax systems tend to have higher costs of
compliance. This fact can be used as the basis for practical or moral arguments in favor of tax
simplification (for example, FairTax and flat tax proposals).

Kinds of taxes

The Organisation for Economic Co-operation and Development (OECD) publishes perhaps the most
comprehensive analysis of worldwide tax systems. In order to do this it has created a comprehensive
categorisation of all taxes in all regimes which it covers.

Ad valorem

An ad valorem tax is one where the tax base is the value of a good, service, or property. Sales taxes,
tariffs, property taxes, inheritance taxes, and value added taxes are different types of ad valorem tax.
An ad valorem tax is typically imposed at the time of a transaction (sales tax or value added tax
(VAT)) but it may be imposed on an annual basis (property tax) or in connection with another
significant event (inheritance tax or tariffs). An alternative to ad valorem taxation is an excise tax,
where the tax base is the quantity of something, regardless of its price.

Bank tax

A bank tax ("bank levy") is a proposed tax on banks. One of the earliest modern uses of the term
"bank tax" occurred in the context of the financial crisis of 2007–2010.

Capital gains tax

A capital gains tax is the tax levied on the profit released upon the sale of a capital asset. In many
cases, the amount of a capital gain is treated as income and subject to the marginal rate of income tax.
However, in an inflationary environment, capital gains may be to some extent illusory: if prices in
general have doubled in five years, then selling an asset for twice the price it was purchased for five

30
years earlier represents no gain at all. Partly to compensate for such changes in the value of money
over time, some jurisdictions, such as the United States, give a favorable capital gains tax rate based
on the length of holding. European jurisdictions have a similar rate reduction to nil on certain property
transactions that qualify for the participation exemption. In Canada, 50% of the gain is taxable
income. In India, Short Term Capital Gains Tax (arising before 1 year) is 10% flat rate of the gains
and Long Term Capital Gains Tax is nil for stocks & mutual fund units held 1 year or more and 20%
for any other assets held 3 years or more. If such a tax is levied on inherited property, it can act as
a de factoprobate or inheritance tax.

Consumption tax

A consumption tax is a tax on non-investment spending, and can be implemented by means of a sales
tax or by modifying an income tax to allow for unlimited deductions for investment or savings.

Corporate tax

Corporate tax refers to a taxes levied by various jurisdictions on the capital or profits of companies or
associations and often includes capital gains of a company. Taxable profits are generally considered
gross revenue less expenses and cost of property sold. Expenditures providing benefit over multiple
periods are often deducted over the useful life of the resulting asset as depreciation or amortization.
Accounting rules about deductible expenses and tax rules about deductible expense may differ, giving
rise to book-tax differences. If the book-tax difference is carried over more than a year, it is referred
to as a temporary difference, which then creates deferred tax assets and liabilities for the corporation,
which are carried on the balance sheet.

Currency transaction tax

A currency transaction tax is a tax placed on a specific type of currency transaction. This term has
been most commonly associated with the financial sector, as opposed to consumption taxes paid by
consumers. There are several types of currency transaction taxes that have been proposed, the most
prominent being the Tobin tax and the Spahn tax. Most remain unimplemented concepts.

Environmental tax

This includes natural resources consumption tax, greenhouse gas tax (Carbon tax), "sulfuric tax", and
others. The stated purpose is to reduce the environmental impact by repricing.

Excises

Unlike an ad valorem, an excise is not a function of the value of the product being taxed. Excise taxes
are based on the quantity, not the value, of product purchased. For example, in the United States, the
Federal government imposes an excise tax of 18.4 cents per U.S. gallon (4.86¢/L) of gasoline, while
state governments levy an additional 8 to 28 cents per U.S. gallon. Excises on particular commodities
are frequently hypothecated. For example, a fuel excise (use tax) is often used to pay for public
transportation, especially roads and bridges and for the protection of the environment. A special form

31
of hypothecation arises where an excise is used to compensate a party to a transaction for alleged
uncontrollable abuse; for example, a blank media tax is a tax on recordable media such as CD-Rs,
whose proceeds are typically allocated to copyright holders. Critics charge that such taxes blindly tax
those who make legitimate and illegitimate usages of the products; for instance, a person or
corporation using CD-R's for data archival should not have to subsidize the producers of popular
music.

Excises (or exemptions from them) are also used to modify consumption patterns (social engineering).
For example, a high excise is used to discourage alcohol consumption, relative to other goods. This
may be combined with hypothecation if the proceeds are then used to pay for the costs of treating
illness caused by alcohol abuse. Similar taxes may exist on tobacco, pornography, etc., and they may
be collectively referred to as "sin taxes". A carbon tax is a tax on the consumption of carbon-based
non-renewable fuels, such as petrol, diesel-fuel, jet fuels, and natural gas. The object is to reduce the
release of carbon into the atmosphere. In the United Kingdom, vehicle excise duty is an annual tax on
vehicle ownership.

Expatriation Tax

An Expatriation Tax is a tax on some people who renounce their citizenship of some governments.

One example is the United States under the American Jobs Creation Act, where any individual who
has a net worth of $2 million or an average income-tax liability of $127,000 who renounces his or her
citizenship and leaves the country is automatically assumed to have done so for tax avoidance reasons
and is subject to a higher tax rate.

Financial activities tax

As a regulatory response and proposal to the financial crisis of 2007-2010, on April 16, 2010,
the IMFproposed three types of global taxes on banks: First, the "Financial Stability Contribution" is a
straight tax on a bank's gross profits—before deducting compensation. It would initially be at a flat
rate, this would eventually be refined so that riskier businesses paid more. Second, the "Financial
Activities Tax" aims directly at excess bank profit and pay. The third, which was not endorsed by the
IMF, but not ruled out as administratively difficult, is a financial transaction tax.

Financial transaction tax

A financial transaction tax is a tax placed on a specific type (or types) of financial transaction for a
specific purpose (or purposes). This term has been most commonly associated with the financial
sector, as opposed to consumption taxes paid by consumers.

There are several types of financial transaction taxes, some of which remain unimplemented concepts.

Income tax

An income tax is a tax levied on the financial income of persons, corporations, or other legal entities.
Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be

32
progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often
called a corporate tax, corporate income tax, or corporation tax. Individual income taxes often tax the
total income of the individual (with some deductions permitted), while corporate income taxes often
tax net income (the difference between gross receipts, expenses, and additional write-offs).

The "tax net" refers to the types of payment that are taxed, which included personal earnings
(wages),capital gains, and business income. The rates for different types of income may vary and
some may not be taxed at all. Capital gains may be taxed when realized (e.g. when shares are sold) or
when incurred (e.g. when shares appreciate in value). Business income may only be taxed if it is
significant or based on the manner in which it is paid. Some types of income, such as interest on bank
savings, may be considered as personal earnings (similar to wages) or as a realized property gain
(similar to selling shares). In some tax systems, personal earnings may be strictly defined where labor,
skill, or investment is required (e.g. wages); in others, they may be defined broadly to include
windfalls (e.g. gambling wins).

Personal income tax is often collected on a pay-as-you-earn basis, with small corrections made soon
after the end of the tax year. These corrections take one of two forms: payments to the government,
for taxpayers who have not paid enough during the tax year; and tax refunds from the government for
those who have overpaid. Income tax systems will often have deductions available that lessen the total
tax liability by reducing total taxable income. They may allow losses from one type of income to be
counted against another. For example, a loss on the stock market may be deducted against taxes paid
on wages. Other tax systems may isolate the loss, such that business losses can only be deducted
against business tax by carrying forward the loss to later tax years.

Inflation tax

An inflation tax is the economic disadvantage suffered by holders of cash and cash equivalents in one
denomination of currency due to the effects of expansionary monetary policy, which acts as ahidden
tax that subtracts value from those assets. Many economists hold that the inflation tax affects the
lower and middle classes more than the rich, as they hold a larger fraction of their income in cash,
they are much less likely to receive the newly created monies before the market has adjusted with
inflated prices, and more often have fixed incomes, wages or pensions. Some argue that inflation is
a regressive consumption tax.[23]

There are systemic effects of an expansionary monetary policy, which are also definitively taxing,
imposing a financial charge on some as a result of the policy. Because the effects of monetary
expansion or counterfeiting are never uniform over an entire economy, the policy influences capital
transfers in the market, creating economic bubbles where the new monies are first introduced.
Economic bubbles increase market instability, and therefore increase investment risk, creating the
conditions common to a recession. This particular tax can be understood to be levied on future
generations that would have benefited from economic growth, and it has a 100% transfer cost (so long

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as people are not acting against their interests, increased uncertainty benefits no-one). One example of
a strong supporter of this tax was the former Federal Reserve chair Beardsley Ruml.

Inheritance tax

Inheritance tax, estate tax, and death tax or duty are the names given to various taxes which arise on
the death of an individual. In United States tax law; there is a distinction between an estate tax and an
inheritance tax: the former taxes the personal representatives of the deceased, while the latter taxes the
beneficiaries of the estate. However, this distinction does not apply in other jurisdictions; for example,
if using this terminology UK inheritance tax would be an estate tax.

Poll tax

A poll tax, also called a per capita tax, or capitation tax, is a tax that levies a set amount per
individual. It is an example of the concept of fixed tax. One of the earliest taxes mentioned in
the Bible of a half-shekel per annum from each adult Jew (Ex. 30:11-16) was a form of poll tax. Poll
taxes are administratively cheap because they are easy to compute and collect and difficult to cheat.
Economists have considered poll taxes economically efficient because people are presumed to be in
fixed supply. However, poll taxes are very unpopular because poorer people pay a higher proportion
of their income than richer people. In addition, the supply of people is in fact not fixed over time: on
average, couples will choose to have fewer children if a poll tax is imposed. The introduction of a poll
tax in medieval England was the primary cause of the 1381 Peasants' Revolt. Scotland was the first to
be used to test the new poll tax in 1989 with England and Wales in 1990. The change from a
progressive local taxation based on property values to a single-rate form of taxation regardless of
ability to pay (the Community Charge, but more popularly referred to as the Poll Tax), led to
widespread refusal to pay and to incidents of civil unrest, known colloquially as the 'Poll Tax Riots'.

Property tax

A property tax is a tax put on property by reason of its ownership. Property tax can be defined as
"generally, tax imposed by municipalities upon owners of property within their jurisdiction based on
the value of such property." There are three species of property: land, improvements to land
(immovable man-made things, e.g. buildings) and personal property (movable things). Real estate or
realty is the combination of land and improvements to land.

Property taxes are usually charged on a recurrent basis (e.g., yearly). A common type of property tax
is an annual charge on the ownership of real estate, where the tax base is the estimated value of the
property. For a period of over 150 years from 1695 a window tax was levied in England, with the
result that one can still see listed buildings with windows bricked up in order to save their owners
money. A similar tax on hearths existed in France and elsewhere, with similar results. The two most
common type of event driven property taxes are stamp duty, charged upon change of ownership, and
inheritance tax, which is imposed in many countries on the estates of the deceased.

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In contrast with a tax on real estate (land and buildings), a land value tax is levied only on the
unimproved value of the land ("land" in this instance may mean either the economic term, i.e., all
natural resources, or the natural resources associated with specific areas of the Earth's surface: "lots"
or "land parcels"). Proponents of land value tax argue that it is economically justified, as it will not
deter production, distort market mechanisms or otherwise create deadweight losses the way other
taxes do.

When real estate is held by a higher government unit or some other entity not subject to taxation by
the local government, the taxing authority may receive a payment in lieu of taxes to compensate it for
some or all of the foregone tax revenue.

In many jurisdictions (including many American states), there is a general tax levied periodically on
residents who own personal property within the jurisdiction. Vehicle and boat registration fees are
subsets of this kind of tax. The tax is often designed with blanket coverage and large exceptions for
things like food and clothing. Household goods are often exempt when kept or used within the
household. Any otherwise non-exempt object can lose its exemption if regularly kept outside the
household .Thus, tax collectors often monitor newspaper articles for stories about wealthy people who
have lent art to museums for public display, because the artworks have then become subject to
personal property tax. If an artwork had to be sent to another state for some touch-ups, it may have
become subject to personal property tax in that state as well.

Social security tax

Some countries with social security systems, which provide income to retired workers, fund those
systems with specific dedicated taxes. These often differ from comprehensive income taxes in that
they are levied only on specific sources of income, generally wages and salary (in which case they are
called payroll taxes). A further difference is that the total amount of the taxes paid by or on behalf of a
worker is typically considered in the calculation of the retirement benefits to which that worker is
entitled. Examples of retirement taxes include the FICA tax, a payroll tax that is collected from
employers and employees in the United States to fund the country's Social Security system; and the
National (NICs) collected from employers and employees in the United Kingdom to fund the
country's national insurance system.

These taxes are sometimes regressive in their immediate effect. For example, in the United States,
each worker, whatever his or her income, pays at the same rate up to a specified cap, but income over
the cap is not taxed. The benefit payments are similarly disproportionate, replacing a higher
percentage of a lower-paid worker's pre-retirement income.

Sales tax

Sales taxes are levied when a commodity is sold to its final consumer. Retail organizations contend
that such taxes discourage retail sales. The question of whether they are generally progressive or
regressive is a subject of much current debate. People with higher incomes spend a lower proportion

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of them, so a flat-rate sales tax will tend to be regressive. It is therefore common to exempt food,
utilities and other necessities from sales taxes, since poor people spend a higher proportion of their
incomes on these commodities, so such exemptions make the tax more progressive. This is the classic
"You pay for what you spend" tax, as only those who spend money on non-exempt (i.e. luxury) items
pay the tax.

A small number of U.S. states rely entirely on sales taxes for state revenue, as those states do not levy
a state income tax. Such states tend to have a moderate to large amount of tourism or inter-state travel
that occurs within their borders, allowing the state to benefit from taxes from people the state would
otherwise not tax. In this way, the state is able to reduce the tax burden on its citizens. The U.S. states
that do not levy a state income tax are Alaska, Tennessee, Florida, Nevada, South Dakota,
Texas, Washington state, and Wyoming. Additionally, New Hampshire and Tennessee levy state
income taxes only on dividends and interest income. Of the above states, only Alaska and New
Hampshire do not levy a state sales tax. Additional information can be obtained at the Federation of
Tax Administrators website.

In the United States, there is a growing movement [ for the replacement of all federal payroll and
income taxes (both corporate and personal) with a national retail sales tax and monthly tax rebate to
households of citizens and legal resident aliens. The tax proposal is named FairTax. In Canada, the
federal sales tax is called the Goods and Services tax (GST) and now stands at 5%. The provinces of
British Columbia, Saskatchewan, Manitoba, Ontario and Prince Edward Island also have a provincial
sales tax [PST]. The provinces of Nova Scotia, New Brunswick, and Newfoundland & Labrador have
harmonized their provincial sales taxes with the GST - Harmonized Sales Tax [HST], and thus is a
full VAT. The province of Quebec collects the Quebec Sales Tax [QST] which is based on the GST
with certain differences. Most businesses can claim back the GST, HST and QST they pay, and so
effectively it is the final consumer who pays the tax.

Tariffs

An import or export tariff (also called customs duty or impost) is a charge for the movement of goods
through a political border. Tariffs discourage trade, and they may be used by governments to protect
domestic industries. A proportion of tariff revenues is often hypothecated to pay government to
maintain a navy or border police. The classic ways of cheating a tariff are smuggling or declaring a
false value of goods. Tax, tariff and trade rules in modern times are usually set together because of
their common impact on industrial policy, investment policy, and agricultural policy. A trade bloc is a
group of allied countries agreeing to minimize or eliminate tariffs against trade with each other, and
possibly to impose protective tariffs on imports from outside the bloc. A customs union has a
common external tariff, and the participating countries share the revenues from tariffs on goods
entering the customs union.

Toll

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A toll is a tax or fee charged to travel via a road, bridge, tunnel, canal, waterway or other
transportation facilities. Historically tolls have been used to pay for public bridge, road and tunnel
projects. They have also been used in privately constructed transport links. The toll is likely to be a
fixed charge, possibly graduated for vehicle type, or for distance on long routes.

Shunpiking is the practice of finding another route to avoid payment of tolls. In some situations where
tolls were increased or felt to be unreasonably high, informal shunpiking by individuals escalated into
a form of boycott by regular users, with the goal of applying the financial stress of lost toll revenue to
the authority determining the levy.

Transfer tax

Historically, in many countries, a contract needed to have a stamp affixed to make it valid. The charge
for the stamp was either a fixed amount or a percentage of the value of the transaction. In most
countries the stamp has been abolished but stamp duty remains. Stamp duty is levied in the UK on the
purchase of shares and securities, the issue of bearer instruments, and certain partnership transactions.
Its modern derivatives, stamp duty reserve tax and stamp duty land tax, are respectively charged on
transactions involving securities and land. Stamp duty has the effect of discouraging speculative
purchases of assets by decreasing liquidity. In the United States transfer tax is often charged by the
state or local government and (in the case of real property transfers) can be tied to the recording of the
deed or other transfer documents.

Value added tax / Goods and Services Tax

A value added tax (VAT), also known as Goods and Services Tax (G.S.T), Single Business Tax, or
Turnover Tax in some countries, applies the equivalent of a sales tax to every operation that creates
value. To give an example, sheet steel is imported by a machine manufacturer. That manufacturer will
pay the VAT on the purchase price, remitting that amount to the government. The manufacturer will
then transform the steel into a machine, selling the machine for a higher price to a wholesale
distributor. The manufacturer will collect the VAT on the higher price, but will remit to the
government only the excess related to the "value added" (the price over the cost of the sheet steel).
The wholesale distributor will then continue the process, charging the retail distributor the VAT on
the entire price to the retailer, but remitting only the amount related to the distribution mark-up to the
government. The last VAT amount is paid by the eventual retail customer who cannot recover any of
the previously paid VAT. For a VAT and sales tax of identical rates, the total tax paid is the same, but
it is paid at differing points in the process.

VAT is usually administrated by requiring the company to complete a VAT return, giving details of
VAT it has been charged (referred to as input tax) and VAT it has charged to others (referred to as
output tax). The difference between output tax and input tax is payable to the Local Tax Authority. If
input tax is greater than output tax the company can claim back money from the Local Tax Authority.

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Wealth (net worth) tax

Some countries' governments will require declaration of the tax payers' balance sheet (assets and
liabilities), and from that exact a tax on net worth (assets minus liabilities), as a percentage of the net
worth, or a percentage of the net worth exceeding a certain level. The tax may be levied on "natural"
or legal. An example is France's ISF.
Although people usually do not like taxes, and governments can become so corrupt and
misdirected that people revolt against paying taxes at all, most recognize the basic need for
some public services, funded by some sort of taxation.

The free market is good at allocating goods and services that producers compete with each
other to supply. Things are not allocated well when monopoly disrupts the process. But there
are some things, real benefits to the entire community, which cannot be had without
monopoly; they are monopolies by their very nature. Consider roads, for example. A highway
is generally built along the most direct route available - what incentive is there to build
another road to compete with it? If the highway were privately owned, the owner could
charge "whatever the traffic would bear" for its use. Rather than award individuals such a
huge privilege, most communities build roads collectively, financing them through taxation.

Henry George believed that businesses that are monopolies by nature should be run by the
government, not left in private hands. It was George's conviction that the primary function of
government is to secure the rights of its citizens - including labor's right to the wealth it
produces.

The Canons of Taxation

The classical economists, with their powerful common sense, outlined four criteria of a good
tax. Their skill is evident in the simplicity and comprehensiveness of the following
provisions.

1) Taxation should bear as lightly as possible on production.

The very word "tax" suggests a burdensome load. Taxation is an allocation of wealth, which
is produced by labor, to the needs of the community; nobody benefits if taxation inhibits
production!

2) It should be easy and cheap to collect, and fall directly on the ultimate payer.

If great resources must be devoted to the collection of taxes, they are simply wasted! Indirect
taxes (such as sales taxes, and tariffs) are imposed on sellers and importers, yet ultimately
paid by consumers. Not only are such taxes unwieldy and cumbersome; they also tend to be
regressive - weighing heavier on those with lower incomes.

3) It should be certain.

The more complex the rules of taxation are, the more they can be subverted and evaded. As
the tax code becomes a hieroglyphic that can be understood only by specialists, only those
who can afford to pay the specialists can take advantage of its loopholes!

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Also, the production of wealth fluctuates from year to year, so if production is taxed, the
amount of revenue cannot be predicted with certainty. Revenue shortfalls have to be met by
means of public borrowing.

4) It should bear equally, so as to give no individual an advantage.

We have seen how regressive sales taxes fail in this regard. The conventional standard of tax
fairness is "ability to pay." People with higher incomes are able to pay a greater part of the
tax burden. The progressive income tax, for example, is based on ability to pay; in fact taxes
are called "progressive" if they bear more heavily on those with higher incomes. But is the
"ability to pay" principle really fair? No - because it makes no distinction between earned and
unearned income. If individuals are more wealthy because they are efficient and honest
producers, then taxing them according to their ability to pay burdens production, violating
rule number one! A truly equitable public revenue system will not confiscate the legitimately
produced wealth of some while allowing others to collect unearned incomes. The alternative
principle of "benefits received" achieves fairness by levying taxes according to the value of
the opportunities people have been given.

Broad-Based Taxation vs. the Single Tax

The favored public revenue strategy today is to make taxation as "broad-based" as possible -
that is, to spread it out over as many different sources as are available. The reasons for this
political as well as theoretical. The more different tax sources there are, the more they can be
played against each other to favor special interests. Local taxes can be played against federal
subsidies, property taxes against sales taxes, taxes on consumption against taxes on
production; an endless variety of deductions, abatements, tariffs or subsidies can be applied
to reward particular constituents.

The theoretical reason is that taxation is considered to be a burden on all economic activity.
When such things as wages, sales, interest, etc. are taxed, it makes goods and services cost
more, thus lowering demand - and demand is what stimulates production. So if all taxes are a
burden on production, then they should be spread over as wide an area as possible to
minimize the load on individual producers.

But there is one thing in the economy that can be taxed very heavily - to the full extent of its
value, in fact - without decreasing the demand for goods and services. A tax on the rental
value of land cannot diminish production, because land is not produced. A land value tax
cannot increase the price of goods because those prices include the cost of land in any case,
whether the rent is paid to a landowner or to the community.

The "broad-based" tax idea, failing to recognize the distinctive character of land as a factor of
production, seeks to spread out the tax burden. In so doing, broad-based taxes - whether by
accident or by design - provide all manner of opportunities for special interests to influence
tax policies in their favor, at the expense of fairness and accountability. Land value taxation,
on the other hand, is merely the collection by the community of the very fund that the
community has created.

Taxation is one of the most hotly contested topics in any political establishment. There is
always a group of people who feel that the government s levying too much taxes on its
people, while there is another group which feels that the government is levying too little tax

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and the amount of taxes should actually be reduced. However, in this article, we are not going
to discuss about determining the best taxation levels, but we are going to look at some of the
disadvantages of taxation that you should pay attention to.

Reduction In Aggregate Demand

The first disadvantage that is associated with taxation is the fact that it usually causes a
reduction in the aggregate demand of the economy. This means that you can find a situation
whereby as the government taxes the citizens and the residents of a particular country, the
money that is received by the government ends up used by the government on foreign
important, when the money would have been used by the people to buy their day to day
items.

Misallocation Of Resources
Another reason why the government should not tax its citizens is because of the fact that
taxation usually causes misallocation of resources, where the resources are being allocated
from the efficient place, to the place that is not efficient. A good example is when the income
of the taxpayer would have been used for the purchase of items that are useful to him, but
then the government uses this money for the purchase of things that are not economically
efficient. In such a case the government creates a situation where the resources are not being
allocated to their best places.

Discourages Investments
The other problem that is associated with taxation is the fact that it goes along way in
discouraging investment and production,. You will find that there are some people who are
taxed at very high rates. Due to the fact that most governments employ progressive taxes, the
more someone earns, the more he is taxed. For this reason, such a person will be discouraged
from investing more and working harder because more and more of his money will be going
to the government instead of his pockets.

These three things are important when considering the disadvantages of and the limitations
that are caused by taxation. However, this does not mean that taxation is bad in itself. It only
means that it has its own disadvantages that should be looked at.

Views on taxation
Ethical basis of taxation
According to most political philosophies, taxes are justified as they fund activities that are necessary
and beneficial to society. Additionally, progressive taxation can be used to reduce inequality in a
society. According to this view, taxation in modern nation-states benefit the majority of the
population and social development. A common presentation of this view, paraphrasing various
statements by Oliver Wendell Holmes, Jr. is "Taxes are the price of civilization".

It can also be argued that in a democracy, because the government is the party performing the act of
imposing taxes, society as a whole decides how the tax system should be organized. The American's
"No taxation without representation" slogan implied this view. For traditional conservatives, the
payment of taxation is justified as part of the general obligations of citizens to obey the law and

40
support established institutions. The conservative position is encapsulated in perhaps the most
famous adage of public finance, "An old tax is a good tax”. Conservatives advocate the "fundamental
conservative premise that no one should be excused from paying for government, lest they come to
believe that government is costless to them with the certain consequence that they will demand more
government 'services'." Social democrats generally favor higher levels of taxation to fund public
provision of a wide range of services such as universal health care and education, as well as the
provision of a range of welfare benefits. As argued by Tony Crosland and others, the capacity to tax
income from capital is a central element of the social democratic case for a mixed economy as
against Marxist arguments for comprehensive public ownership of capital.
Many libertarians recommend a minimal level of taxation in order to maximize the protection of
liberty.

Compulsory taxation of individuals, such as income tax, is often justified on grounds including
territorial sovereignty, and the social contract. Defenders of business taxation argue that it is an
efficient method of taxing income that ultimately flows to individuals, or that separate taxation of
business is justified on the grounds that commercial activity necessarily involves use of publicly
established and maintained economic infrastructure, and that businesses are in effect charged for this
use. Georgist economists argue that all of the economic rent collected from natural resources (land,
mineral extraction, fishing quotas, etc.) is unearned income, and belongs to the community rather than
any individual. They advocate a high tax (the "Single Tax") on land and other natural resources to
return this unearned income to the state, but no other taxes.

Views opposed to taxation

Because payment of tax is compulsory and enforced by the legal system, some political philosophies
view taxation as theft (or as a violation of property rights), or tyranny, accusing the government of
levying taxes via force and coercive means. Voluntaryists, anarchists, objectivists, anarcho-capitalists,
and libertarians see taxation as government aggression .The view that democracy legitimizes taxation
is rejected by those who argue that all forms of government, including laws chosen by democratic
means, are fundamentally oppressive. According to Ludwig von Mises, "society as a whole" should

41
not make such decisions, due to methodological individualism. Libertarian opponents of taxation
claim that governmental protection, such as police and defense forces might be replaced
by market alternatives such as private, arbitration agencies or voluntary contributions. Walter E.
Williams, professor of economics at George Mason University, stated "Government income
redistribution programs produce the same result as theft. In fact, that's what a thief does; he
redistributes income. The difference between government and thievery is mostly a matter of legality."

Discourse surrounding taxation generally places an emphasis on the intended benefits (healthcare,
schools and so on), but rarely points to the harm caused by forced removal of possessions.

Taxation has also been opposed by communists and socialists. Karl Marx assumed that taxation

would be unnecessary after the advent of communism and looked forward to the "withering away of
the state". In socialist economies such as that of China, taxation played a minor role, since most
government income was derived from the ownership of enterprises, and it was argued by some that
taxation was not necessary. While the morality of taxation is sometimes questioned, most arguments
about taxation revolve around the degree and method of taxation and associated government, not
taxation itself.

CONCLUSION

In one point of view taxation is an advantage to the country with another point view of disadvantages.
So to develop an economy taxation is necessary as it increases the National income of the country,
useful for infrastructural purposes etc.,

BIBILOGRAPHY

www.incometaxindia.com

www.wikipedia.com

www.tax4india.com

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