Tax Book 2023

Ethics in Tax Laws Chapter- 02

 To counter the effects of inflation or depression;

 To reduce inequalities in the distribution of wealth;

 To promote science and invention, finance educational activities or maintain and improve

the efficiency of local forces;

 To implement laws which eliminate discrimination among various elements in the markets

/ businesses?

In the second Chapter, we discussed the provisions of Constitution of Pakistan which

empowers the legislators to legislate for levy of Taxes on the masses. These powers are not

unfettered and it should carry some ethical and rational basis. This matter is further discussed

as under:

2.2 Ethics and canons of taxation

According to Hugh Dalton, "a tax is a compulsory contribution imposed by a public authority,

irrespective of the exact amount of service rendered to the taxpayer in return, and not imposed

as penalty for any legal offence."

As per above definition, Taxes are compulsory contribution. Secondly, its compliance is must

for a citizen living in that prescribed Jurisdiction otherwise State has right of enforcement its

laws including recovery of tax through prescribed coercive measures. Now, state right to tax its

masses should be based upon some rational basis. A good tax system is one which is designed

on the basis of an appropriate set of principles (rules).

The tax system should strike a balance between the interest of the taxpayer and that of tax

authorities. Adam Smith was the first economist to develop a list of Canons of Taxation. These

canons are still regarded as characteristics or features of a good tax system.

2.3 Canons of taxation

What are Canons of Taxation? Canons of Taxation are the main basic principles (i.e. rules) set

to build a 'Good Tax System'. The canons of taxation are as under:

(i) Canon of Equity: The word equality here does not mean that everyone should pay the

exact, equal amount of tax. What equality really means here is that the rich people should

pay more taxes and the poor pay less. This is because the amount of tax should be in

proportion to the abilities of the tax payer. It is one of the fundamental concepts to bring

social equality in the country.

The canon of equality states that there should be justice, in the form of equality, when it

comes to paying taxes. Not only does it bring social justice, it is also one of the primary

means for reaching the equal distribution of wealth in an economy.

(ii) Canon of Certainty: The tax payers should be well-aware of the purpose, amount and

manner of the tax payment. Everything should be made clear, simple and absolutely

certain for the benefit of the taxpayer. The canon of certainty is considered a very

important guidance rule when it comes to formulating the tax laws and procedures in a

country. The canon of certainty ensures that the taxpayer should have full knowledge

about his tax payment, which includes the amount to be paid, the mode it should be paid

in and the due-date. It is believed that if the canon of certainty is not present, it leads to

tax evasion.

(iii) Canon of Convenience: Canon of convenience can be understood as an extension of

canon of certainty. Where canon of certainty states that the taxpayer should be well-

aware of the amount, manner and mode of paying taxes, the canon of convenience states

that all this should easy, convenient and taxpayer-friendly. The time and manner of

payment must be convenient for the tax payer so that he is able to pay his taxes in due

time. If the time and manner of the payment is not convenient, then it may lead to tax

evasion and corruption.