India has always been a consumption driven economy and that is going to change over the next decade. This article is useless because the intellectuals who read this are not the vote bank but only 3% of those who contribute to the state exchequer. But do read it anyway.
In India, the economic engine carries the weight of a burgeoning population on its shoulders, thriving under a paradoxical taxation regime. Just around 3% of the taxpayers form the cornerstone of the country’s tax revenues, yet their contributions often return little by way of job security, social security, pension, or health security. This article delves into the dichotomies within the Indian taxation framework that rests on the labours of an extraordinarily small segment of society.
The tax system in India has often been a subject of scrutiny, particularly when it comes to how salaried employees and corporate entities are treated in terms of taxation. Salaried employees, who form a substantial portion of the working population, have to pay taxes on their incomes, while corporate entities are taxed on their profits. This fundamental difference in the taxation structure often leads to a perceived imbalance in the burden of taxation.
Salaried employees, through the mechanism of TDS (tax deducted at source), bear the brunt of paying taxes on their income even before they receive it. Additionally, they also absorb several indirect costs as consumers, such as Goods and Services Tax (GST) on a wide range of goods and services. On the other hand, corporate entities are able to claim input tax credit on the GST they pay on their inputs, effectively reducing their tax burden.
This disparity highlights a systemic issue wherein individual taxpayers, especially the salaried class, seem to shoulder a significant portion of the tax burden, while corporate entities often benefit from various tax incentives and deductions. This leads to a situation where those who are relatively more financially secure, i.e., the corporate entities, receive favourable treatment in the tax system, while the salaried employees face a comparatively heavier tax load.
The prevailing tax ecosystem in India appears to be structured in a way that extracts a substantial contribution from the salaried class, without necessarily providing them with commensurate benefits or relief. This often leads to a sense of helplessness and frustration among individual taxpayers who perceive that they are not receiving equitable treatment within the tax framework.
Direct Tax Collections: The Select Contributors
In the realm of direct taxes, primarily comprising income tax, a meager slice of less than 3% of the Indian population bears the brunt of the responsibility. These individuals and corporations fall within the income bracket that is taxable under the law, often paying significantly higher rates as their earnings increase, following a progressive tax structure.
Unlike many developed economies where the tax net is widespread and encompasses a vast majority of the workforce, the Indian tax system sees a large portion of the informal sector escape the tax radar. This is compounded by agricultural income being non-taxable (agriculture being a significant part of the Indian economy and employment) and several exemptions that lower the effective tax base, leaving the weighty task of direct tax contribution to a slender percentage of the workforce.
I do realize that it is not fair to ask the poor and needy to pay tax, however there are super-rich ‘farmers’ and ‘pseudo-farmers’ too. Yes, there should be a threshold equivalent to the ‘poverty line’ but above that, everyone should contribute – it does not matter whether they pay 1% or 2% and so on. This will also make them realize that they contribute to society and all the welfare measures adopted by the government for various freebies. Agricultural income should not be taxed (like the salaried) but agricultural profits should certainly be taxed above a particular threshold, for example Rs. 10 lakhs per annum.
Indirect Tax Collections: The Invisible Burden Bearer
The narrative takes a convoluted turn with indirect taxes like Goods and Services Tax (GST), excise duty, and customs duty. Unlike direct taxes, these are shouldered by a broad spectrum of the population, as they are levied on goods and services. However, it is important to note that the formal sector—incorporating the same limited segment which pays direct taxes—accounts for nearly the entirety of indirect tax collections as they are part of the recorded economy where such taxes are implemented and collected effectively.
In India, the informal sector makes up a large part of the economy but remains largely outside the ambit of formal taxation despite consuming goods and services. Consequently, the direct taxpayers also become significant indirect taxpayers, as their consumption patterns reflect higher expenditure and hence, higher indirect tax contribution. Whereas the tax burden should be equitable, it is not really so, as Indians pay phenomenally high rates of indirect taxes as compared to the rest of the world – I am all in favour of ‘sin tax’ but certainly not in favour of ‘multiple rates of tax’ extending to 28% for so-called ‘luxury items’. Just because a privileged few get these ‘luxuries’ free of cost or sponsored by their employers, it does not translate that the salaried individual should now be penalized for the same.
Disproportionate Burden with Minimal Returns
The result of such a skewed tax structure is that these taxpayers end up contributing disproportionately to both direct and indirect taxes without commensurate returns in welfare. For most, there is no job security as private-sector employees are often at the mercy of market dynamics. Social security nets are meager at best, with limited coverage for unemployment or destitution.
Pensions, particularly in the private sector, do not echo the contribution made by these taxpayers. The absence of a robust pension system leaves many without financial security in their old age. Moreover, India’s healthcare system is underfinanced and overburdened, meaning that health security remains a concern despite substantial personal contributions through taxes.
Reform Imperative
There is an urgent need for structural reforms to make the tax system more equitable. Broadening the tax base is critical to ensure a more balanced distribution of the tax burden. Simplification of tax regimes and minimizing exemptions can help elevate more individuals and businesses into the taxable threshold, thereby reducing the excessive reliance on a slim fraction of the populace.
Additionally, enhancing government services and social security mechanisms can ensure that taxpayers receive tangible returns on their contributions. This includes strengthening public healthcare, establishing effective pension schemes, and creating safety nets to protect against unemployment and economic downturns.
A Long Conclusion
India’s taxation paradox is a complicated web of inequities. The country’s tax revenues hinge upon a slender percentage of its population, putting immense pressure on a small taxpayer base while providing minimal welfare benefits in return. Redressing this imbalance is not just a matter of fiscal policy but a question of social justice and economic prudence. A reformed and fair taxation system can pave the way for sustainable development, ensuring that the burdens and benefits of economic growth are shared more equitably across the societal strata.
Addressing these issues requires a comprehensive revaluation of the tax system to ensure fairness and equity for all taxpayers. It involves scrutinizing the existing tax structures and exploring ways to alleviate the burden on individual taxpayers, particularly the salaried class. Additionally, there is a need to reexamine the treatment of corporate taxation to ensure that it does not inadvertently lead to an asymmetrical burden on individual taxpayers.
In essence, there is a compelling need to recalibrate the tax system in India to ensure that it serves the interests of all stakeholders fairly. This calls for a nuanced approach that takes into account the concerns of individual taxpayers and seeks to rectify existing imbalances within the tax framework. By doing so, the tax ecosystem can be transformed into a more equitable and inclusive system that addresses the needs of all taxpayers, regardless of their financial standing.
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