CA Foundation · Business Economics · Public Finance
A state government introduces a progressive tax on luxury vehicles. The average tax rate increases from 8% to 14% as the vehicle's price rises from ₹25 lakhs to ₹80 lakhs. Which principle of taxation is being prioritised by this structure?
The progressive structure reflects the ability-to-pay principle, which posits that taxation burden should increase proportionally with taxpayer capacity, recognising that wealthier individuals purchasing costlier vehicles have greater ability to contribute to public revenues.
- APrinciple of convenience
- BAbility-to-pay principleCorrect
- CPrinciple of certainty
- DBenefit principle
Explanation
Progressive taxation—where average tax rate increases with income or wealth—reflects the ability-to-pay principle, assuming those with higher capacity to pay should bear a greater tax burden. Luxury vehicles are owned by wealthier individuals, justifying higher proportional taxation. The principle of convenience relates to payment practicality; certainty to clarity; and benefit principle to charging based on services received.
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