The rate of taxation and its types, such as customs, excise, GST, VAT, personal income and corporate tax, are reflective of the economic policy. Striking a balance between direct and indirect taxes, and amending them, are tricky. Mint looks at how India has dealt with it.

How have indirect and direct taxes changed?

The government’s direct tax collections, mainly corporate and personal income tax, comprised 55% of gross tax revenue in FY20. Nearly 20 years ago, the share of direct taxes in the total collection was 33%. This increase is due to e-filing of returns, computerization of departmental functions, a jump in the number of personal income tax assessees, tax evasion steps, and administrative measures like TDS extension. The decline in the share of indirect taxes (customs, services tax, excise, GST) came as a result of governments lowering taxes to attract investments, and to comply with trade commitments to the World Trade Organization.

What’s the issue with tax imposition in crisis?

Direct taxes are considered more equitable and pro-poor than indirect taxes, as they are directly levied on incomes. Higher the income, higher the tax, thus taking care of the poor who are either outside the tax bracket or pay very little in taxes. Increasing taxes is essentially, not a popular idea, particularly in times like these, when people have had to take salary cuts due to looming crisis. Higher taxes are even more unpopular with the common man as they have few avenues to escape tax, unlike corporates, which have various instruments in their capacity to lower their tax outgo, or enjoy various taxation benefits.

Revenue composition

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Revenue composition

Why are tax revenues so important and crucial?

Tax revenues form a stable revenue source for governments. They come under an established framework of governance and are predictable and enforceable. They help the government fund its social sector schemes and public infrastructure projects. Further, lower tax collections by the Centre impact devolution to states, that is, the states’ share in central taxes.

Does fiscal  space rest on revenues alone?

Fiscal space, or the extent to which the government has room to spend more without undermining fiscal sustainability, depends on aplenty factors: debt structure and debt-GDP ratio in particular, external economic environment and the government’s ability to raise domestically without undermining its sovereign risk, or the risk of the government defaulting on its debt. More importantly, the fiscal space is dependent upon the evolution of gross domestic product (GDP) as a result of increased government spending.

How can govt tackle its tight fiscal position?

While the current economic crisis may be deep-seated and recovery could take time, the government should think of ‘unconventional fiscal policy tools’. Economists suggest that India could reimpose wealth tax on super-rich to expand the fiscal space. It’s time to bring big-ticket GST reforms such as lowering the number of tax slabs, bringing petroleum and electricity under its ambit. The Centre must plan steps to mobilize revenues to support quality social expenditure.

Nitya Chutani is Assistant Professor of economics at a DU college.

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