Direct tax revenues fall below indirect taxes for the second time in 13 years, hurting the poor
Next month we will celebrate 30 years since the launch of economic reforms. On June 21, 1991, Narasimha Rao was sworn in as the ninth Prime Minister of India, and his tenure was historic in the implementation of economic reforms in modern India.
A month later, on July 24, 1991, its Minister of Finance, Dr Manmohan Singh, presented his historic first budget. Quoting Victor Hugo in Parliament, Dr Singh said: “… no power on earth can stop an idea whose time has come. I suggest to this august Assembly that the emergence of India as a major economic power in the world happens to be one of these ideas. ”
This budget was revolutionary for many reasons, the main one being the end of the Raj license permit. It also paved the way for opening up the economy to foreign investment. Many other reforms were reported, and over the following years India experienced reforms and deregulation of banking, business and capital markets. But an equally important part of the 1991 discourse was a change in the fiscal position. Commenting on the budget, The Hindu’s editorial the next day, that is, July 25, 1991, stated: “the budget marks a major shift in the collection of revenue from indirect taxes to direct taxes and should cheer equity advocates. “
Over the past 30 years, the mix of revenue collected for the central government has shifted from indirect taxes to direct taxes. The ratio was then 80:20 and is now approximately 50:50. Indirect taxes such as a consumption tax or import duties are regressive and hurt the poor far more than the rich, relatively speaking.
GST is an indirect tax and does not depend on the income of the payer. The tax on soap or toothpaste or a dose is the same whether you are rich or poor. Indirect taxes are therefore fundamentally unfair and regressive. The maturity of an economy and a tax administration can be measured by the size of the share of direct taxes.
Purists among tax experts say that income is earned by human beings, so the tax unit should be human beings, not inanimate things, like a corporation or bar of soap. In other words, we should ideally tax only the income accruing to each individual, and not the price of an item, good or service.
But individuals’ incomes are notoriously difficult to track, and humans will not voluntarily disclose income fully and honestly. This is why indirect taxation is used because it is easier to administer and more difficult to dodge. But signs of progress appear when the share of taxes collected comes more from direct taxes, such as income, dividends, capital gains and inheritance.
As income tracking becomes more sophisticated, with electronic tagging of PAN numbers and withholding tax deduction, it is now possible to track even dividend payments and capital gains in the stock market. This is why we recently abolished the tax on dividend distributions and now tax the dividend directly in the hands of the receiver. Technology makes it possible to shift from indirect taxes to direct taxes.