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In the financial year 2021, India’s direct tax collection stood at Rs 9.45 lakh crore while indirect tax collection was Rs 10.71 lakh crore. OECD countries collect the lion’s share of their taxes from the direct variety — indeed, that’s the mark of a developed economy. India is on the verge of attaining this hallowed status, but it has a lot of catching up to do on the direct tax front. Indirect taxes – taxes that can be passed on down the line, with the responsibility falling to the final consumer – are regressive because they hit the poor hardest. As things stand, India only has an income tax belonging to the genus of direct taxes, having abandoned wealth tax in 2015 and suspended inheritance tax as early as 1985. Nordic countries, famous for their welfare economics, subsidize education and health by charging a rigid 40% income tax. The latest data is intuitively more biased in favor of indirect taxes, with the government increasingly betting on the 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 has extended its GST net to GST registered tenants on the residential rent they pay, in the name of corporate taxation and to packaged food, in the name of brand name taxation, forgetting that they will pass the burden on to end consumers. Despite the government’s innocent protestations that bulk milk is not affected by the GST, the fact remains by and large in urban centers that it is packaged milk all the way, except perhaps in Delhi where Mother Dairy offers milk dispensers. Truth be told, the GST is a low hanging fruit, just like the fuel tax. The demand for petroleum products is largely inelastic and the government, knowing this, has cheated this source all the way with the flippant explanation that it does so to finance gargantuan social spending. You cannot tax the poor to spend it back on the poor. Robin Hood taxation is about taxing the rich to help the poor. We knocked it down! There are possible reforms in the system of indirect taxes. The late Arun Jaitley, who spearheaded the GST legislation, struggled to explain why a single rate of GST just wasn’t enforced – you can’t tax Hawaii slippers and air conditioners at the same rate . But he had no qualms about pampering jewelry with a sweet 3% GST. If packaged food can be taxed at 5%, jewelry should certainly be taxed at a much higher rate. The GST was introduced to eliminate the cascading effect of the previous system of indirect taxes — tax on tax. The cascading effect is most pronounced in fuel taxation in India. Yet it remains outside the GST system. We must not delay bringing it within the scope of the GST. Petrol, diesel and gas prices would drop significantly with this fundamental reform. And the system of direct taxes calls for reforms without disrupting tax rates. First, equity investors should be taxed in the same way as employees. In fact, the Direct Tax Code (CDI) which was discussed with much fanfare at the start of the UPA regime swore by the solemn principle that income is income and that there should be no difference in how any type of income is taxed. However, the DTC has been inexplicably abandoned and the pampering of select incomes continues unabated. Long-term equity gains are canceled with a slap on the wrist – a 10% flat tax after a generous first Rs 1 lakh full exemption. Short-term gains are taxed at 15%. Why should it be so when a salaried person has to pay a tax of 30% on income above Rs 10 lac? Public charitable trusts are another sacred cow. They are pampered with full tax exemption. It is understandable that the Ramakrishna mission or any other institution exercising genuine charity would get complete exemption from income tax, but not educational institutions, hospitals and newspapers run by trusts which charge for their services equally with their corporate counterparts. They get away with this undeserved largesse thanks to our mistaken world view of what a charitable purpose is – we have confused worthy purposes with charitable purposes. And it is the same mistaken worldview that is reflected in hospitals, newspapers and colleges pampered with free land. to apply the law. The fault, however, was in what he was aiming for. Only six types of assets have been targeted, whereas in all fairness all assets should be targeted without selection. A wealth tax of, say, 2% on net assets above Rs 5 crore will do no harm, just as an inheritance tax of, say, 10% on estates exceeding, say, Rs 10 crore will not hurt heirs. Some states in the United States seize up to 50% of the estate as inheritance tax or inheritance tax, prompting corporate czars like Bill Gates and Warren Buffet to extol the virtues of gifting and the loss of wealth during his lifetime so as not to have to squirm uncomfortably in the grave. The appeal of indirect taxes lies in the ease of collecting them, making them low-hanging fruit. This is why the ad hoc measure recently introduced, the windfall tax on oil producers and refineries in India, focuses on production and not on revenue. Revenues can be manipulated while production records lend themselves less to tinkering. Also, the income tax guys have to wait to put the shovel in, whereas indirect taxes have a here and now character. But this is not a reason for direct taxes to be disadvantaged. Only they can be targeted to the haves. Dr. Subramaniam Swamy, the maverick Harvard economist, enfant terrible and executioner of those who have skeletons in their cupboards, calls for an expenditure tax instead of income tax. It is no small pity that the NDA governments at the center have ignored its prescription. Although in the genre of direct taxes, it is potentially disruptive and prone to leakage as it does not lend itself to enforcement through a TDS scheme. Income is lumpy and easier to button. Expenditure, on the other hand, is in pieces and thus defies year-end aggregation, even by the honest. Indeed, previous alliances with him too were short-lived and fruitless. It was first introduced by TT Krishnamachari (then Minister of Finance) in 1957 but abolished in 1962 by Morarji Desai. It was brought back in 1964 only to be abolished in 1966. Chaudhary Charan Singh tried to bring it back in 1979 but failed. The author is a freelance columnist for various publications and writes on economic, business, legal and tax issues (To receive our daily E-paper on WhatsApp, please click here. To receive it on Telegram, please click here. We allow sharing of the PDF of the diary on WhatsApp and other social media platforms.)
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