Indirect but Serious Pain

 By abolishing a number of taxes and simplifying the tax structure, Goods and Services Tax, GST had promised to reduce our tax burden and result in fall in prices. We knew that it has so far failed to do both (also failed to significantly boost government revenue), but to what extent it has contributed to widening the inequality gap? A recent analysis of NSSO data by Oxfam presents quite a shocking picture: almost two-third of the total GST collection is coming from the bottom 50 per cent Indians, one-third from middle 40 per cent and just three to four per cent from the top 10 per cent. And in terms of household budgets, the impact of a high indirect tax regime is quite devastating - the bottom 50 per cent of the population pays six times more on indirect taxation as a percentage of income compared to top 10 per cent.

 We have argued in Countdown that contrary to popular belief and government statements, we Indians are heavily taxed and an increasing reliance on indirect tax is extremely unfair to poor. If they buy the same product or service, then all consumers from Mukesh Ambani to a landless labourer pay the same amount of GST without any relation to their income. Most developed countries thus impose high direct tax and keep indirect taxes low as it is regressive in nature.

 Now, this Oxfam analysis produces telling evidence of such tax burden on India’s poor: their estimates – based on NSSO data - suggest that the bottom 50 per cent spends 6.7 per cent of their income on taxes for select food and non-food items. Middle 40 per cent spends half of that on food and non-food items (3.3 per cent of their income). However, the top 10 per cent spends just 0.4 per cent of their income on these items (select items, so this is only indicative difference, not actual share of tax paid).

And the bottom 50% ends up contributing 64.30% or nearly two third of total GST collected -

 

(Both the tables are from Oxfam report)

Since the implementation of GST in 2017, the share of direct taxes out of the total gross tax revenue has come down from 52% to 47% per cent by 2020-21. As the share of indirect taxes rise in overall tax collection, the lower-income households, and other economically vulnerable sections like unemployed and pensioners suffer more.

It was argued that after the introduction of GST, effective tax rates would come down. The median tax rate under the four-tier GST regime today stands at 18% as against the global average of 14%. But there is more to it. States impose 15–35% tax on petroleum products, which are outside the purview of the GST. This is in addition to excise and customs imposed by the centre. Taxes on immovable property and electricity consumption are again outside the GST structure. As a result, on an average, Indian consumers are subjected to the highest indirect tax rates in the world at around 25–27%.

This is even worse for the bottom 50% as the share of basic items like food, energy is much higher in their overall consumption basket – thus they end up paying much more tax proportionate to their income rather than the rich.

 To boost demand as well as to give relief to the poor from this unfair tax burden, the government should introduce a two-rate (7–20%) GST structure. All items of mass consumption and some other manufacturing may be kept in the 7% band and rest in the 20% band. A fall in the peak rate is likely to increase consumption of discretionary items and tax collection.

 Less tax on income and higher tax on consumption go against the interests of lower and middle income groups. Even as the government refuses to cut down GST rates with the argument of revenue loss, it has been steadily bringing down the tax burden for the super rich. India abolished wealth tax in 2016. In 2019, surcharge on more than ₹10 crore income was removed.

Same is the story with corporate tax, where a commentator observed that “…. In short, the story of India’s corporation tax revenues is about how more and more companies have been taxed at a lower rate” and this does not benefit the government’s coffer either. In 2019, peak corporate tax rate was reduced from 30% to 22%. As a result of steady decrease in corporate tax, the share of corporate tax in the Centre’s gross tax revenue came down from 34% in 2014-15 to just 23% in 2020-21.

Add to such sharp reductions in corporate tax and income tax on super rich, other concessions given to corporates - in 2020-21, the projected revenue foregone of the government this way stood at Rs 1.03 lakh crore, which is higher than the entire allocation that year towards the MGNREGA.