Double Taxation: Meaning, Desirability, Forms & Solution

Introduction

A modern state tries to tap all possible sources to meet the ever-increasing need for funds. With the extension of the functions of the modern welfare state, they are under persistent pressure to spread as wide as possible their net tax so that the revenues are raised to meet their needs.

Now every state has to take recourse to a system of multiple taxation not only to raise the maximum revenue but also to make tax as equitable as possible. Thus in this tax system, almost every taxpayer is subject to double or multiple taxation.

A tax system that depends on a number of taxes is called a system of multiple taxes. It means that several kinds of taxes are imposed in the system of multiple taxation. Some taxes are levied on and paid by those who carry certain possession or trade. Others may be paid by property owners and yet those who purchase certain commodities. These taxes are shifted and re-shifted, and ultimately, their money burden and real burden are diffused over the society in one way or another.

The term double taxation is used in public economics in a restricted sense. It implies that the taxation of the same thing or the same base twice or more in the same period. It does not mean taxation of the same man twice.

According to Prof. J. K. Mehta, ‘double taxation means the taxing of a person twice by two authorities in the same way, that is, on the same thing or the taxing of the same base twice by the same authority.

Meaning of Taxing Twice

The major types of double taxation under single taxing authority are as follows:

The property can be taxed on the basis of its income yielded from it and also again on the basis of its capital value. Here the property is subjected to tax twice.

The income can be taxed when it is received at the same time it is spent.

A tax can be imposed on the corporate profits and also on the dividends by the shareholders. Here the shareholders are subjected to tax twice. A tax may be imposed on the person who receives income and from whom it is received.

Desirability of Double Taxation

The desirability of double taxation can be analyzed on two grounds:

One from the point of equity and the second from the point of the burden of the tax.

Here taxpayers do not support double taxation because it creates injustice because if all the citizens were taxed twice, then no one would bother, but when some people are taxed twice and others are left out automatically, that is injustice or discrimination.

If everybody is taxed twice on the same thing and in the same way, then it makes no difference. But if one man has to pay tax twice on the same thing and the other man once, it discriminates against the first man. It does not conform to the principle of ability to pay.

Hence it is said in the case of double taxation, the tax system as a whole may not achieve any equity between taxpayers, and thus it violates the principle of taxation.

It should also be noted that double taxation is condemned because it does some injustice to the payer. Otherwise, double taxation has no fault in itself. Thus Prof. J. K. Mehta said that ‘since double taxation involves inequity, we want to do away with it’.

Another possibility is that though the tax system as a whole achieves equity, the tax burden may be too heavy due to double or multiple taxation. In such a case, it is objected from the point of view of the burden of taxation or its weight, but there is no defect from the point of view of the theory of taxation. The remedy lies in the reduction of taxation and expenditure to a level directed by the principles of public finance.

Forms of Double Taxation

Double Taxation can be placed into Two broad Categories:

1. Double Taxation by Two Competing Authorities:

If there are two governments either within the same country or in different countries, and they both levy income tax on a person, then it becomes a case of double taxation by two competing authorities. Double taxation due to a plurality of taxing authorities occurs either in a federation or as between the different independent countries.

International double taxation arises partly because it is in the national interest to exact taxes from foreigners, thereby increasing the national welfare at the expense of others and partly because the taxes are levied on the basis of origin as well as that of domicile. Persons whose income originates in one country and who are domiciled in another country have to pay taxes to both countries.

Thus double taxation places an artificial impediment on the free flow of capital and other resources such as the services of technicians and experts between countries. Thus double taxation is a barrier which tends to keep capital within the national frontier and prevent it from flowing freely over such frontiers.

2. Double Taxation due to the Same Taxing Authority Taxing the Same Thing Twice

The other type of double taxation is due to the same authority taxing the same thing twice.

There are mainly three principal ways in which double taxation arises.

Firstly, double taxation arises when a company’s profit is taxed before distribution, and then the shareholders’ dividend is taxed again. This type of double taxation can be seen in modern times. The same thing has been taxed before division and after division.

Secondly, the case of double taxation by the same authority may arise when debtors and creditors are taxed both on the amount of a loan. Here the same man is not taxed twice, but the same money has been taxed twice. It is taxed twice because it belongs to two persons and does some work for both. The owner gets the interest on his loan, and the borrower gets the use of it.

Thirdly, a case of double taxation may arise when capital and income are taxed. There is the case of double taxation, when a man’s capital is taxed, and then the income arising from the use of capital is taxed. Here the income is derived from capital goods, but the value of capital goods is derived from income. Thus it is again another case of double taxation.

Read Also: Solution to Problem of Double Taxation

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