[By Mohit Gupta]
The author is a Ph.D. Researcher at Centre for the Study of Law and Governance, Jawaharlal Nehru University, New Delhi.
There are various types of taxes levied by the government which can broadly be categorized into two categories – Direct and Indirect Taxes. Direct Taxes are those taxes for which the burden and incidence of the tax fall on the same person- that is the tax cannot be shifted by a taxpayer on some else and it includes takes on Income, Wealth, Corporation Tax, etc. On the other hand in the case of Indirect taxes, the burden, and incidence of the tax fall on different entities which imply that tax can be shifted by the taxpayer to someone else and includes central excise duty, Valued Added Tax (VAT), customs duty, Goods and Services Tax (GST), etc. In the case of direct taxes like Income tax there is usually an increase in the percentage of taxes with an increase in intervals of a threshold level of income which is known as ‘progressive rate of taxation; whereas Indirect taxes may have to be paid by customers on commodities which are consumed by rich or poor irrespective of their income levels (like VAT on petrol, diesel or GST on eatables like biscuits, butter, etc.) and thus an increase in indirect tax hurts the poor more compared to the rich making them ‘regressive taxes’.
It is important to keep this otherwise obvious distinction in mind regarding the nature of taxes. It is based on this difference and other important factors that we argue that there is an urgent need to re-examine the domestic tax scenario in the country in order to meet the economic challenges posed by the recent Covid-19 pandemic. This is more so because supply bottlenecks notwithstanding, what is a grave problem currently is a demand constrained economy. Thus, there is an urgent need for an expansionary fiscal policy that can revive domestic demand by an increase in government expenditure; more so because there is a near collapse of all other domestic activity following a negligible expenditure by household and private sector (Ghosh, 2020). In these difficult times, an impetus for such a policy can come from raising the tax revenues alongside other measures, especially when the government is reluctant to raise its borrowing (to fund any extra government spending) to adhere to its objective of keeping the fiscal deficit in check. However, it is another matter of concern that the obsession of the government of keeping ‘fiscal deficit to Gross Domestic Product (GDP)’ ratio in check by not increasing government expenditure in times of a pandemic is a flawed economic policy because an attempt to do so by suppressing government expenditure, in turn, will lead to lower GDP which implies a lower denominator value in fiscal deficit to GDP ratio and thus an increase in the overall value of deficit ratio even with similar expenditure (Chandrasekhar and Ghosh, 2020). Be that as it may, let us shift our focus back towards gauging at ways resorted by the government for raising the tax revenues in the present times while struggling to keep the deficit ratio in check.
In the present discussion, we shall keep our focus on two of the important taxes of the government and the need to re-examine their levy in times of a pandemic. One of these is a direct tax (Corporation tax) and the other is an indirect tax (GST). In addition to these two taxes being the key contributor to the overall tax revenues of the government, the need for re-assessing and focussing on these two taxes, in particular, emanates from the fact that there have been some key developments around them recently which requires a re-examination which is pointed out in the ensuing discussion.
First, if one talks about the direct taxes then taxes on income is the main source of direct taxation in India. The rules for income tax in India are defined by the Income Tax Act, 1961. The rates of taxation for various entities (Individuals, HUFs, Firms, Companies, and Others) laid down in this Act are amended every year through the Finance Act. These rates which are prescribed by law are called the ‘statutory rates of taxation’. These are defined in terms of tax slabs where a percentage of taxation is announced corresponding to a certain threshold income level. However, the income earned by the various assesses is not always subjected to this statutory rate of taxation. The total income that is subjected to taxation is reduced from the original income because of various deductions available as per law. Thus there is a distinction between the statutory rates prescribed by law and what actually the assessee end up paying as taxes because of these deductions. The actual payment of tax as a proportion of the total declared income of the assessee is the ‘effective rate of taxation’ (Bandyopadhyay, 2012; Rao, 2015). Thus to put it simply, the effective tax rate paid by an assessee can be computed as the ratio of tax paid to the total income expressed in percentage terms. The effective rates of taxation by their very construct are thus lower than the statutory rates of taxation.
It is important to understand this distinction in the backdrop of the recent changes in the corporate tax rates in India which were announced last year on 20th September 2019 through the Taxation Laws (Amendment) Ordinance 2019 by making amendments in the Income-tax Act 1961 and the Finance (No. 2) Act 2019. This amendment and the corresponding reduction in the corporate taxes were hailed as unprecedented structural reforms in the history of the country which were aimed at reviving a sluggish economy by boosting private investment. After this amendment, the effective rate for existing companies was slashed to 25.17% (including surcharge and cesses) while that for new manufacturing companies (incorporated after 1st October 2019) the effective tax rate was slashed to 17.01% (including surcharge and cesses) subjected to the condition that they will not claim any other exemption/incentive. It was estimated that the loss in revenue from this would be nearly INR 1.45 lakh crore.
Thus this development created the ground for a precarious condition for the government treasury much before the onset of the pandemic by creating a deep hole in the exchequer. The current pandemic has only added to the woes of the government by disrupting the routine tax collections. Further, even if one does not delve into the moral question of reducing the importance of annual budget by making such important financial announcements in an ad-hoc manner through ordinance route in the middle of the year, then also there was little or no strong economic basis of justifying this midterm ‘corporate bonanza’ through a largely supply-side intervention because of multiple reasons. This included the debate on the efficacy of a supply-side intervention when in fact sluggish demand plagued the economy, the slow and lagged response from a supply-side intervention, and most importantly given the fact that there was a decline in gross tax collections as well as the shortfall in tax revenue compared to the budget estimates in the last two years. It is also important to remember that majority of the corporate sector operates as a group and not an individual company, therefore, they have multiple avenues of avoiding taxes by redistributing incomes among group entities and hence a significant percentage of the existing corporate sector already paid an extremely low percentage of effective tax rates even before this intervention (Das Gupta and Gupta, 2017). This corporate tax cut thus proved to be a bad gamble for a resource crunched economy.
To read Part 2 of this article, please click here.
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