In the financial year 2021, India’s direct tax collection stood at Rs 9.45 lakh crore while the indirect tax collection was at Rs 10.71 lakh crore. OECD countries collect lion’s share of their taxes from the direct variety — indeed, that is the hallmark of a developed economy. India is on the cusp of attaining that hallowed status but it has a lot of catching up to do on the direct taxes front. Indirect taxes — taxes that are capable of being passed down the line with the buck stopping with the ultimate consumer — are regressive, as they hit the poor more. As it is, India has only income tax belonging to the direct taxes genre, having jettisoned wealth tax in 2015 and having suspended estate duty as far back as in 1985. Nordic nations, famous for their welfare economics, subsidise education and health by charging a stiff income tax of 40%.
The latest data intuitively is bound to be more skewed in favour of indirect taxes, what with the government increasingly setting store by GST whose collections at Rs 1.49 crore in July 2022 were the highest since its inception. And the government is not done yet. Recently it extended its GST dragnet to tenants registered under GST on the residential rent they pay, in the name of taxing corporates and to packaged food products, in the name of taxing big brands, forgetting that they will pass on the burden to the ultimate consumers. Despite the innocent protestations of the government that loose milk isn’t hit by GST, the fact remains by and large in urban centres it is packaged milk all the way except perhaps in Delhi where Mother Dairy has milk dispensing vends. Truth be told, GST is low-hanging fruit just as fuel tax is. Demand for petroleum products is largely inelastic and the government, knowing this, has been bilking this source to the hilt with the glib explanation that it is doing so to fund the gargantuan welfare expenditure. You can’t tax the poor to spend it back on the poor. Robin Hood taxation is all about taxing the rich to help the poor. We have turned it on its head!
There are reforms possible within the indirect taxes regime. The late Arun Jaitley who piloted the GST legislation was at pains to explain why a single rate GST was simply not on — you can’t tax Hawaii slippers and air-conditioners at the same rate. But he had no qualms over cossetting jewellery with a soft 3% GST. If packaged food items can be taxed at 5% then surely jewellery should be taxed at a much higher rate. GST was ushered in to do away with the cascading effect of the earlier indirect taxes regime — tax on tax. Cascading effect is most pronounced in fuel taxation in India. Yet it remains outside the GST regime. Bringing it within the ambit of GST should not be delayed. Petrol, diesel and gas prices would come down substantially with this one seminal reform.
And the direct taxes regime is crying out for reforms without disturbing the tax rates. First, investors in shares should be taxed at par with the salaried. In fact, the Direct Taxes Code (DTC) which was discussed with a lot of fanfare in the beginning of the UPA regime swore by the solemn principle that income is income and there should be no difference in the way any type of income is taxed. DTC however was inexplicably junked and pampering of certain select incomes continues unabated. Long-term gains from shares are let off with a slap on the wrist — flat 10% tax after a generous total exemption to the first Rs 1 lakh. Short-term gains are taxed at flat 15%. Why should this be so when a salaried person has to fork out a 30% tax on income in excess of Rs 10 lac?
Public charitable trusts are another holy cow. They are pampered with complete tax exemption. One can understand Ramakrishna Mission or any other institution carrying out genuine charity getting a complete income tax exemption but not educational institutions, hospitals and newspapers run by trusts which charge for their services on par with their corporate counterparts. They have been getting away with this undeserved largesse thanks to our misguided worldview of what is a charitable purpose — we have mistaken laudable purposes for charitable purposes. And it is the same misguided worldview that is reflected in pampering hospitals, newspapers and colleges with free lands.
Wealth tax was abolished in 2015 on the specious ground that the revenue therefrom, in the region of about Rs 2000 crore, was less than the cost of administering the law. The fault however was with what it targeted. Only six types of assets were targeted whereas in all fairness all assets should be targeted without cherry-picking. Wealth tax of say 2% on net assets in excess of Rs 5 crore won’t hurt just as an estate duty of say 10% on estates in excess of say Rs 10 crore won’t hurt the inheritors. Some of the states in the USA impound as much as 50% of the estate as inheritance tax or estate duty thus impelling corporate czars like Bill Gates and Warren Buffet to extol the virtues of gifting and shedding wealth during one’s lifetime so that one doesn’t have to squirm uncomfortably in the grave.
The appeal of indirect taxes lies in ease of collection, making them low-hanging fruit. Which is why the recently introduced ad hoc measure, windfall tax on oil producers and refineries in India, is on production and not on income. Income can be manipulated whereas production records are less amenable to tinkering. Furthermore, the income tax guys have to wait to put their shovels in, whereas indirect taxes have a here-and-now character. But that is no reason why direct taxes should be in disfavour. They alone can be targeted at the affluent.
Dr Subramaniam Swamy, the maverick Harvard economist, enfant terrible and tormentor of those who have skeletons in their cupboards, pines for expenditure tax in lieu of income tax. It is no small mercy that the NDA governments at the centre have ignored his prescription. Despite belonging to the direct taxes genre, it is potentially disruptive and leakage-prone as it isn’t amenable to enforcement through a TDS regime. Income is lumpy and easier to buttonhole. Expenditure on the other hand is in bits and pieces and thus defies year-end aggregation even by the honest. Indeed, the earlier dalliances with it too were ephemeral and unsuccessful. First it was introduced by T T Krishnamachari (then Finance Minister) in 1957 but abolished in 1962 by Morarji Desai. It was brought back again in 1964 only to be abolished in 1966. Chaudhary Charan Singh tried to bring it again in 1979 but failed.
The author is a freelance columnist for various publications and writes on economics, business, legal, and taxation issues