Tax Reforms

Increasing dependence on indirect taxes and issues with it


From UPSC perspective, the following things are important :

Prelims level: Direct and indirect taxes

Mains level: Paper 3- Increasing proportion of indirect taxes in India and issues with it

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.


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.


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

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