1. Canon of Ability:
The State is necessary for all – rich and poor. Without the State, nobody’s life or property is safe. So, everyone is required to pay taxes to meet the expenses of the State. But a person who earns Rs.10, 000 a year does not have the same taxable capacity as the person who earns Rs.100, 000 a year. The canon of ability states that a person should be made to pay taxes according to his ability to pay. If everyone pays according to their ability, there is equality of sacrifice. So, this rule of Adam Smith is also known as the canon of equity.
2. Canon of Certainty:
The principle of certainty requires that the tax which every individual has to pay should be certain and not arbitrary. The time of payment and the amount to be paid ought to be clear and plain to the contributor and to every other person.
3. Canon of Convenience:
The time and manner of tax payments should be made as convenient to taxpayers as possible. The pay-as-you-earn (PAYE) method of collecting personal taxation under which an employer deducts tax on behalf of employees and pays it to the Finance Department is a good example of this quality.
For this reason, the salaried persons are taxed at the source, that is, at the source of income. Some taxes are collected in installments so as to make it convenient for the taxpayer to make the payment in small amounts. On the other hand, self-employed persons and companies have to set aside money reserves to be able pay to the tax when they are assessed.
4. Canon of Economy:
According to Smith again, “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 or the state.” A tax whose collection involves high expenditure should be avoided. Taxes should be levied in such a way as to minimise the cost of collection in terms of revenues collected.
5. Canon of Elasticity:
A tax should be sufficiently elastic in yield. The amount of tax ought to be so contrived that it can be varied according to the changes in the level of income of the people. The land revenue is, however, fixed for a period. It is not liable to be changed as is possible in the case of income tax. In case of crop failure, the government can, of course, grant remission.
6. Canon of Productivity:
All taxes should be productive. It is better not to impose a tax whose yield is negligible. The canon of productivity implies that taxes should be imposed in such a manner as not to hamper production or to decrease the amount of revenues collected. In other words, the levy of a tax should not only increase the income of the state, it must not also destroy the incentives of the people to undertake productive enterprises.
These canons are regarded as characteristics of a good tax system. A good tax system must try to follow all these principles. But most of these are not present in India.