GS Paper: GS3

India, with a tax-GDP ratio of 10.9 per cent in 2019 needs an overhaul of its tax system. This article analyses India’s growing dependence on indirect taxes and its implications for the poor.

Important changes in direct taxes

• The wealth tax was abolished in 2016.
• Wealth tax was replaced by a 2 per cent surcharge on super-rich individuals with taxable income of over Rs 10 crore.
• But the government rolled back the increase in surcharge in 2019.
• Corporate taxes were slashed from 30 per cent to 22 per cent to attract foreign investors and induce Indian companies to invest.
•  Cuts in corporate tax that have resulted in a revenue loss of Rs 1.5 lakh crore have contributed to making the state poor.

Increasing indirect taxes and cess

• The share of indirect taxes has increased by up to 50 per cent of the gross tax revenue in FY2019 from 43 per cent in FY2011.
• The combined share of customs and excise duties and value-added tax reached an all-time high of 10.5 per cent of GDP.
• This high was following a three-year-long steady increase in customs or excise duty on commonly used goods, such as petroleum products, metals and sugar, automobiles and consumer durables.
• This is also when the service tax was hiked steadily to 18 per cent under GST from 12.4 per cent in 2014.
• Swachh Bharat cess and Krishi Kalyan cesses were imposed in addition to GST.
• The permanent nature of these cesses has been widely opposed by the states and criticised by the CAG.
• CAG has pointed out the lack of transparency and incomplete reporting in accounts on the utilisation of amounts collected under cesses.
• All of this is troubling because indirect taxes often penalise the poor and the middle class more than the rich.

Case for the wealth tax

• High tax rates on the wealthy in Europe have played a key role in ensuring a strong social security net for the poor.
• This successful example should encourage India to consider the rationale for a wealth tax.
• Higher taxes on the super-rich could be used for cash transfers and a fiscal stimulus, that, in India, at 1 per cent of GDP each, have been negligible so far.
• A wealth tax, a COVID-19 cess on the super-rich and a surcharge on the super-rich for their income from listed equity shares are critical for mitigating the current situation.

Issues with such policy

• Cuts in corporate taxes, increased indirect tax revenues, decreased capital expenditure and practically no change in revenue expenditure on health and education show that India’s taxation policy is more business-friendly than pro-poor.
• This is happening at a time when a supply-side oriented approach to the economy is counter-cyclical.
• Faced with increased expenditure amid pandemic Centre increased the duty on fuel by a record Rs 10 per litre on petrol when global crude prices have been falling.
• This speaks of the government’s increased dependency on indirect tax-based revenues.

Examine the implications of India’s growing dependence on indirect tax revenue? Suggest the measures to reduce such dependence.

Conclusion

COVID-19 may be a blessing in disguise if it allows India to reform its tax system in order to make it work towards inclusive growth and sustainable development rather than targeting only investment-led economic growth.

bACK 2 BASICS

GO THROUGH THE ARTICLE BELOW FOR MORE INFORMATION ON TAXATION:

Taxation in India: Classification, Types, Direct tax, Indirect tax

The focus of this article is on the behavioural changes in the consumer post Covid. It also suggest the ways to deal with these changes.

Context

• The consumer during and post-COVID is showing remarkable flexibility, bringing about a paradigm shift in her consumption pattern.

Issue of generating demand

• Some state governments are busy demanding the opening up of the economy.
• However, the issue is that the economy does not merely need opening up, but it requires urgent generation of basic demand.
• That is why consumer behaviour needs to be closely watched.
• Since the lockdown, the priorities of consumers have seen a drastic shift.

Factors to consider to increase demand

• 1) The decrease in the purchasing power to buy products needs to be addressed.
• The government must look at ways like a reduction in taxes which will help the common man.
• 2) The current scenario has also made all of us go back to the basic needs.
• Luxury products hold little value. But renting will increase.
• 3) The emphasis will be on saving for a rainy day, whether in the case of banks or households
• 4) Aviation, tourism and hospitality sectors have been hit and continue to remain so even after the restrictions are lifted.
• 5)  e-commerce has shown exponential growth and will continue to do so.
• 6) With “Vocal for Local” gaining momentum, there’s a huge increase in local apps, local kirana stores, local artisans and brands.
• 7) Schools and colleges have taken a hit as e-learning and online courses are being preferred.
• 8) The entertainment industry has been drastically hit. The media and entertainment industry needs to pay heed to this and curate content accordingly.
• 9) With a lot of people laying emphasis on their health and immunity, there’s been a substantial rise in the consumption of organic, ayurvedic, and immunity-boosting products.
• Apart from the obvious products, financial and medical insurance will play an important role.
• 10) Real estate will suffer as no long-term, high investment purchases will be favoured, but renting will increase.

Role of the government

• 1) People need to be provided with their daily needs — basic essentials such as food, water, housing, and electricity.
• The government is already taking care of that, but money also needs to be given.
• 2) Jobs need to be provided through development of infrastructure projects.
• 3) Farmers need to have insurance for their crops and the infrastructure to sell at the right price.
• 4) Migrant workers with their livelihoods being disrupted are looking for support,and many are focusing on agriculture as a means of income.

Way forward

• The government should focus on generating demand for products, and create jobs by improving infrastructure.
• The government must incentivise spending by offering tax benefits on the amount spent.
• Government must forget about fiscal prudence this year.
• Consumers in rural areas are buying more than before.Companies should focus on tapping the rural demand

Consider the question “Demand has been the driver of India’s growth. But the pandemic has dampened it with devastating effect. Agaist this backdrop suggest the measures to be taken by the government to revive the demand.”

Conclusion

With focus on these emerging trends and changing behaviour of the consumers, the government must take steps to bring the economy fast on the tracks.

India’s growth has been fuelled by demand which has dampened owing to various factors. One untapped source of demand could be the group which lies at the bottom of income pyramid. This article suggests the ways to increase the income of this group.

Structural demand problem

• India’s structural demand problem predates the COVID-19 shock.
• This problem has been compounded after lockdown as jobs have been lost and incomes have collapsed.
• Boosting domestic demand is critical for an economic revival as external demand is likely to remain muted.
• It is argued that India’s growth story has been driven by demand generated by those who are at the top of India’s socio-economic pyramid
• But the demand from that section has now plateaued.

So, where the demand is going to come from?

•  Turn to those at the bottom of the pyramid.
• Those at the bottom of pyramid have a high marginal propensity to consume.
• But realising the untapped demand potential of this group requires enhancing their incomes and earnings.

Division of India’s workforce

• Periodic Labour Force Survey (2018-19) tells us that less than 10 per cent of the workforce is engaged in regular formal jobs.
• Another 14 per cent are engaged in regular informal jobs with average monthly earnings (Rs 9,500), which is roughly equivalent to or slightly below a minimum wage.
• The self-employed and casual workers account for 50 per cent and 24 per cent of the workforce respectively and report average earnings that are considerably below a decent minimum amount.
• Casual workers, who are unlikely to receive work on every day of the month, are at the bottom of the employment structure.

How to increase the earning of those at the bottom of employment structure

• Devising strategies that enhance productivity growth in the informal economy could increase their income.
• Raising the minimum wages of the worst-off workers.
• At present, under the Minimum Wage Act,  India has a complex set of minimum wages which offer different wages by occupation type and skill levels.
• The Code on Wages (2019) seeks to universalise minimum wages and extend them to the unorganised sector.

Way forward

• 1) Ensuring a decent minimum wage for those who are the bottom of the distribution — the casual labour, would be helpful in this context.
• This will help set a higher wage floor for others engaged in low-paid work, including regular informal workers.
• 2) It is also important that minimum wages are paid in public workfare programmes too, in particular MGNREGA works.
• At present, MGNREGA wages are not covered under the Minimum Wages Act.
• 3) The minimum wage can be linked to the consumption expenditure of the relatively better-off group of workers.

Consider the question “India’s growth story is scripted by demand which has been tapering off. The new source of demand could be those at the bottom of income structure. Suggest the strategies to increase the income of this group which could then translate into demand.”

Conclusion

The Indian employment challenge today cannot be seen independently of the problem of inadequate income. The above intervention will not only enable income enhancement of those in low-paid work but also add fuel to demand and growth, this time from those at the bottom of the distribution.