Tax and the Crisis

Context: Centre’s reliance on indirect tax revenue, pro-rich policy, has deprived the government of resources during COVID crisis.

Features of Anti-Poor Taxation Policy: Regressive Taxation Policy ????

• Increased Reliance on indirect tax share: by up to 50% of the gross tax revenue.
• Customs and excise duties and value-added tax reached an all-time high of 10.5% of GDP. 
• A service tax hike of 18% (under GST) from 12.4% in 2014. 
• The imposition of fresh cesses such as the Swachh Bharat cess and Krishi Kalyan cess in addition to GST. 
• Increased duty on fuel: by a record Rs 10 per litre on petrol.
• Reduction in direct tax share: 
• Abolition and replacement of wealth tax: by a surcharge (2%) on super-rich individuals.
• Reducing direct tax rates: Corporate tax cut from 30% to 22% for attracting foreign investors and inducing investment.

• Opacity in Tax/cess collection: The Comptroller and Auditor General (CAG) has pointed out the lack of transparency and incomplete reporting in accounts of amounts collected under Krishi Kalyan Cess.

Consequences of India’s Anti-poor Taxation Policy:

• Reduced expenditure for Health and Expenditure: Corporate tax rate cut, increased indirect tax revenues, decreased capital expenditure has reduced expenditure on health and education.

• Revenue loss: It has resulted in a revenue loss of Rs 1.5 lakh crore.

• Rising fiscal deficit (5% of the GDP) and lowering tax revenues.
• India’s tax-GDP ratio was only 10.9% in 2019, as against the OECD average of 34%.

• Deferred tax payments, with continued late fees and penalties on filling extensions.

Arguments in Favour of Wealth/Higher Tax on Super Rich: Could pave the way for Inclusive growth and sustainable development.

• Sustainable Revenue Growth: 
• Cash transfers and a fiscal stimulus: can be sustained via wealth tax.
• According to IIFL Wealth Hurun India Rich List: a tax rate of 4% on super-rich would generate revenues equivalent of 1% of GDP.
• Inclusive Growth:
• Income and social inequalities: can be reduced by shifting from the concentration of wealth towards the distribution of wealth.
• Strong social security net for the poor: can be sustained by imposing higher taxes on the wealthy individual (like in Europe).