Creeping inflation and petrol and diesel at Rs100 per litre, have made life difficult for the common man. Succour is not in sight, the rise in oil prices is incessant ~ hardly a day goes by when oil prices do not increase. The common man is not amused when he learns that the actual cost of petrol and diesel is around Rs 40 per litre, the rest being taxes levied by the Union and State Governments. Mindful of public sentiment, both the Union Government and State Governments often talk about reducing taxes on fuel but neither wants to forego a lucrative source of revenue.

Public utterances about bringing fuel oils under GST, which would reduce tax, remain just that. Meanwhile living, transportation and production costs keep on rising. Reforming the taxation system to increase production and employment while keeping inflation under control is the most serious challenge facing Indian planners. The current trend of regressive Indirect Taxes (both GST and non-GST) collections exceeding the progressive Direct Taxes (Income-tax and Corporate-tax) collections, exemplifies the malaise in the taxation system.

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For the Financial Year 2019-20, Indirect Tax collections stood at Rs 10.71 lakh crore while Direct Tax collections were Rs 9.45 lakh crores. The fast rise in indirect collections is a matter of concern because indirect taxes affect the poor much more than the rich. The trend of Indirect Tax collections exceeding Direct Taxes continues unabated. In the first quarter of the current financial year, Direct Tax collections amounted to Rs 2.47 lakh crore while Indirect Tax collection stood Rs 3.11 lakh crore.

Boosting revenue collection by increasing GST or Excise rates e.g., raising Excise Duty on petrol from Rs.19.98 a litre to Rs 32.90 and on diesel to Rs 31.80 from Rs 15.83 is an easy, but not necessarily a good option. GST is levied in five different tax slabs: 0, 5, 12, 18 and 28 per cent respectively. Additionally, there is a special rate of 0.25 per cent for rough precious and semi-precious stones and 3 per cent on gold. A cess of 22 per cent on top of 28 per cent GST is levied on items like aerated drinks, luxury cars and tobacco products.

Most countries have a single rate of GST: 49 countries use a single rate, 28 use two rates, and only 5 countries viz. India Italy, Luxembourg, Pakistan and Ghana use four rates. Multiple tax rates force businesses to classify inputs and outputs based on the applicable tax rate. Further, to claim input tax credit, a firm requires to match invoices between outputs and inputs, such exercises increase the compliance burden as well as the compliance cost. Then, working capital gets locked up, due to slow refund processing and complicated administrative processes often lead to frauds.

Interestingly, India has the second-highest GST rate among 115 countries studied by the World Bank. Sometimes, states levy new taxes in addition to GST e.g., Tamil Nadu started levying an entertainment tax in addition to 28 per cent GST and Maharashtra increased motor vehicles tax to compensate for losses due to GST. The World Bank’s India Development Update, 2018 called India’s GST too complex. Simplification of processes, moving towards one slab of taxation and most importantly, reduction in rates are required to reform GST.

A similar disturbing trend has emerged in Income-tax collections, with Personal Incometax collection exceeding Corporate Tax collections, which would imply that individuals and small businesses are bearing the tax burden more than big businesses. Probably, due to frequent tinkering by the annual Finance Acts (and sometimes in mid-year also), the Income-tax Act has lost much of its logic and equity. According to CMIE data, the profitability of listed companies grew by 212.4 per cent in the last quarter of FY 2020-21, and their revenues increased by 14.7 per cent, but Corporate Tax collections declined by 18 per cent in FY 2020-21. Earlier, due to the lowering of Corporate Tax rates in Budget 2019, Corporate Tax collections had fallen by 16 per cent in 2019-20.

Overall, Corporate Tax collections have fallen by more than 31 per cent since 2018-19. On the other hand, Personal Income-tax collections increased in FY 2019-20 and went down only marginally (by 2.3 per cent) in FY 2020-21. One of the reasons for this anomaly is: individuals are taxed at 30 per cent (on income exceeding Rs 15 lakh) and firms are taxed at 30 per cent on all income, while manufacturing companies are taxed at 15 per cent and non-manufacturing companies are taxed at 22 per cent. Given the requirement of numerous statutory compliances for corporates, smaller businesses are generally organised as firms, so a higher taxation rate for firms disincentivizes small businesses, which are generally labour intensive.

Therefore, to promote small businesses and generate employment, tax rates for firms should be brought on par with those of corporates. The cost to the exchequer would not be high; Income-tax Departmental statistics for the assessment year 2018-19 show that the aggregate tax liability for 12,69,736 firms was Rs 42,993 crore while aggregate tax liability for 8,41,942 companies was Rs 4,31,041 crore. Thus, halving the tax rate for firms would result in an outgo of less than Rs 20,000 crores, which could be made up in due course from the increased income of firms. Equity also dictates that after the tax write down of Rs 1,45,000 crore for corporates, smaller businesses should also be given some relief.

The legendary investor, Warren Buffet, found that while he was paying taxes at 18 per cent, his secretary was being taxed at 35 per cent. Probably, high rates of personal taxation combined with low tax rates for companies incentivises tax evasion with owners declaring higher corporate income and availing various doubtful exemptions on personal income. Making the tax system more productive, by levying taxes on wealth and inheritance is another doable option before the Government.

All recent Union Budgets have used the revenue collection figure as a balancing entry, fixing impossible targets for tax collection in the process. For example, Budget 2020 assumed revenue collection for the pandemic-hit year at Rs 24.23 lakh crore, an increase of 20.5 per cent over the earlier year’s figure, while the actual collection was nearer Rs.19 lakh crores. Every year, in the closing months of the financial year, we witness the charade of CBDT and CBIC directing field staff to collect all they can, which is followed by some strong-arm measures by lower-level staff leading to charges of ‘tax terrorism’ and admonition by Courts, resulting in the abandonment of the tax collection drive.

This needless spectacle could be avoided by being realistic at the time of Budget making. The failure of the Direct Tax regime is reflected in the rising inequalities in Indian society. During the last financial year alone, there was a 15 per cent increase in the poverty rate in rural areas, and a 20 per cent increase in urban areas, with 23 crore Indians being pushed back into poverty. On the other hand, the earnings of the uber rich have grown exponentially; India has added 55 billionaires in 2020, and Mukesh Ambani and Gautam Adani are now the richest persons in Asia, upstaging their Chinese counterparts. With the trickle-down approach failing everywhere, the Government may stop drawing up over-ambitious growth plans, that are financed by high indirect taxes and mostly benefit the rich.

Rather, the Government may aim at lower but more inclusive growth. An attempt may also be made to curb corruption and non-productive expenditure. A beginning may be made by auditing Central Sector Schemes and Centrally Sponsored Schemes, allocation for which has increased to Rs 14.33 lakh crore in FY 2021-22, from Rs 12.28 lakh crores in FY 2020-21. As noted by the Fifteenth Finance Commission, most of the evergreen Central Sector Schemes and Centrally Sponsored Schemes are dysfunctional and a drain on our scarce resources. To conclude, the bane of the Indian Economy is the adoption of ersatz solutions for deeprooted structural problems.

Most countries have already implemented comprehensive tax reforms. Great Britain, from whom we inherited our tax system, has integrated Direct Taxes (Inland Revenue) and Indirect Taxes (Customs and Excise) under Her Majesty’s Revenue and Customs Board (HMRC) in 2005, and the IRS Code 1986 of the US incorporates both Direct and Indirect Taxes, while Indian tax authorities view bare minimum co-ordination between the CBDT and CBIC as a great success. Instead of high rates of VAT and GST, a rationalisation and reimagination of the entire tax system and budget making is required.

What President Reagan said for the US, applies squarely to us: “The problem is not that the people are taxed too little. The problem is that Government spends too much.

(The writer is a retired Principal Chief Commissioner of Income-Tax)