INTRODUCTION
In the modern forms of Government, especially in democracies, the concept of a ‘welfare state’ is fundamental and is often the stated purpose for the existence of certain Governments. Engaging in schemes and spending plans that improve the lives of citizens is at the core of this concept.
Taxation forms one of the major sources of revenue for any Government and is a very important tool in the implementation of their spending plans[1]. In India, taxation is applied through direct and indirect means as it forms approximately 64% of the Government’s total revenue[2].
The purpose of taxation is the collection of revenue, but in a democratic form of Government, the spending of the revenue is subject to scrutiny by the voters through their elected representatives in Parliament. However, the idea of a consistent distribution of taxpayer money is a myth in the good sense of the word. Certain types of Government expenditure are non-productive and should be avoided for a sensible fiscal budget but are not for certain reasons that will be covered further on.
This blog will cover the various forms of revenue collection by the Government of India and its spending in the economy while critiquing certain negative aspects of the taxation system in India
TAXES IN INDIA
The taxes in India are many, but clearly defined by various legislations. The broad types of taxes are Direct and Indirect taxes. These types encompass most of the taxes imposed by the Central and State Governments in India. Here is a brief look at many of the taxes.
Direct taxes are taxes which are paid by individuals on their income. This type of tax is based on the idea of progressive taxation, which gives backing to much of Indian taxation i.e. the individuals with the greater ability to pay taxes, will pay greater amounts of taxes due to their larger income[3]. The basic taxes in this category include Income Tax and Corporate Tax.
Other taxes do fall in this category, primarily taxes on assets owned by individuals such as property tax, wealth tax and other relevant cesses imposed.
Indirect Taxes are taxes imposed by the Government from entities based on transactions it engaged in. While this tax is imposed on products at every stage of the supply chain, the price increase ensures the customers pay the full price of these taxes in the truest sense of the word[4]. These taxes include the current Goods and Service Tax or GST which are applicable at different rates on goods purchased by Indian consumers.
There are other sources of taxes for the Indian Government, through the levying of cesses on income and corporate taxes, surtaxes and trade, where import tariffs form a good percentage of revenue for the Indian Government.
However, the single largest source of income for the Government is through internal and external borrowing. Due to the socialist policy of the Indian Government for the last 70 years, the budget of India has always operated in a deficit. The idea of operating in a budget deficit is to foster healthy inflation, which acts as a booster to the economic growth of the country.
Given that the Government is spending money of a greater amount than that acquired through taxes, borrowing covers the approximately 30% deficit being run by successive Indian Governments.
EQUITY?
The theory backing Indian taxation is the one of progressive taxation. The individuals and entities with higher income will be liable to pay greater amounts of taxes which will be used for the benefit of the less wealthy parts of society.
This theory also forms the core of a true welfare state. However, this theory is having problems in the application of the same in India. For an academic comparison, we can take a look at the Scandinavian nations, which are more socialist than certain European nations.
Despite high taxes, with Income Taxes averaging at around 38%[5], the population is content with the taxation. This is because the returns being provided on the high taxation, are covering the costs borne by the taxpayers while paying taxes. Certain examples include free healthcare and nearly free-of-cost primary education.
In India, despite the Income Tax rate’s highest slab being 33%[6], the majority of the Indian population does not pay Income Taxes. This puts unnecessary pressure on the elect few who diligently pay income taxes, namely the Urban Middle Class.
THE SQUEEZE
The Indian Income tax rates, while being at 33% officially, with the application of surtaxes, the effective tax rate is driven up to 40%. This puts India at par with Scandinavian taxation as previously mentioned. The problems with taxation start to appear not merely with the hard percentage, but with accompanying factors.
India is still a largely agricultural nation, with Agriculture consisting of 42% of India’s total GDP[7]. The Agricultural Sector is a massively profitable sector which contributes heavily to India’s economy and spending.
However, all agricultural income is exempt from taxation under Section 10(1) of the Income Tax Act, 1961[8]. This makes 148 Million people in the Indian agricultural sector not liable to pay any income tax combined with access to Government subsidies that taxpayers fund.
The Corporate Sector has been given many tax breaks and opportunities for tax breaks. Leaving aside the general reduction in corporate tax rate from 39% in 2001 to 25% in 2019[9]. The increase in legislation mandating Corporate Social Responsibility (CSR) has created more opportunities for companies to cut short their tax amount payable to the Government.
The remaining sector is the Middle Class. This economic group has seen no real tax breaks since the liberalisation of 1991 and have been paying the majority of the income taxes of India for decades.
The Indian Income Tax Act provides no opportunities for reducing the tax burden on individuals in this group other than a few avenues such as property, where a tax break is granted on the EMI paid for the Housing Loan[10]. With no other aspects given, the Middle Class pays the largest share of its income as income tax.
CONCLUSION
Drawing references to the Scandinavian model, higher taxes are utilised in equitable distribution among the population. Citing the large population of India, a large percentage of whom are poor, the Indian Government earmarks little expenditure on the middle class, despite them being one of the largest providers of funds, which are used by the Government to fund schemes to alleviate poverty.
While this strategy is egalitarian and necessary, a clear negligence can be seen towards the Urban Middle Class by successive Indian Governments. While Government expenditure has been made on infrastructure programs, such as expressway creations and building on the railway networks of India, these programs primarily affect the Indian industry and only marginally have a direct benefit to the Middle Class.
The Indian taxation is often cited as being less harsh than the tax codes of their European or American counterparts, but these analyses seem to be existent primarily on paper and the reality of the Indian taxation is the skewed implementation of the same, along with the skewed expenditure of the taxes.
Author(s) Name: Jay Pandya (NMIMS University)
Reference(s):
[1] S.M. Jha, ‘Taxation and the Indian Economy’ (1990) 1
[2] NDTV Profit desk, ‘Explained: How India earns each Rupee and where it goes’ (NDTV Profit, 5 February 2023) <https://www.ndtvprofit.com/business/budget-2023-how-government-earns-and-spends-every-rupee-3754918> Accessed 16 January, 2024
[3] Julia Kagan, ‘Direct Tax Definition, History and Examples’ (Investopedia, 2 May 2022) <https://www.investopedia.com/terms/d/directtax.asp#:~:text=A%20direct%20tax%20is%20paid,taxes%2C%20and%20taxes%20on%20assets.> Accessed 16 January 2024
[4] Julia Kagan, ‘Indirect Tax: Definition, Meaning and Common Examples’ (Investopedia, 22 October 2022) <https://www.investopedia.com/terms/i/indirecttax.asp> Accessed 16 January 2024
[5] Daniel Bunn, Sean Bray, Joost Haddinga, ‘Insights into the Tax Systems of Scandinavian Countries’ (Tax Foundation 20 April 2023) <https://taxfoundation.org/blog/scandinavian-social-programs-taxes-2023/#:~:text=In%202021%2C%20the%20tax%20wedge,OECD%20average%20of%2034.6%20percent.> Accessed 17 January 2024
[6] Ektha Surana, ‘Income Tax Slabs FY 2023-24 & AY 2024-25 (New & Old Regime Tax Rates)’ (Clear Tax, 8 January 2024) <https://cleartax.in/s/income-tax-slabs> Accessed 17 January 2024
[7] ‘Employment in Agriculture’ (The World Bank January 2021) <https://data.worldbank.org/indicator/SL.AGR.EMPL.ZS?locations=IN> Accessed 18 January 2024
[8] Income Tax Act 1961, s 10(1)
[9] ‘Indian Corporate Tax Rate (Trading Economics December 2022) <https://tradingeconomics.com/india/corporate-tax-rate#:~:text=The%20Corporate%20Tax%20Rate%20in,of%20Finance%2C%20Government%20of%20India> Accessed 18 January 2024
[10] ‘Home Loan Tax Benefit-How to save Income Tax on on your Home Loan’ (ClearTax, 18 December 2022) <https://cleartax.in/s/home-loan-tax-benefits> Accessed 18 January 2024
