Why in the news?

Recent data show that Personal Income Tax Collections have increased, while collections from Corporate Taxes have reduced.

The present context of the rising share of Personal Income Tax and Indirect Tax:

• Shift in Tax Composition: The data illustrates a significant shift in the composition of tax revenue, with personal income tax forming a larger share compared to corporate tax. This trend is accentuated by the sharp decline in corporate tax following the 2019 tax cuts.
• Progressive vs. Regressive Taxation: Direct taxes, such as personal income tax, are considered progressive as they are based on income levels, whereas indirect taxes, like GST, are regressive, impacting all consumers uniformly regardless of their income.
  • The increasing share of indirect taxes implies a heavier burden on lower-income individuals.
• Trend in Tax Composition: Chart 2 demonstrates a historical trend where indirect taxes had been decreasing since the 1980s, whereas direct taxes were on the rise. However, recent years have witnessed a reversal of this trend, with indirect taxes increasing and direct taxes declining.
• International Comparison: Comparisons with BRICS economies indicate that India’s effective personal income tax rate is among the highest. This implies that Indian taxpayers may face relatively higher tax rates compared to individuals in other emerging economies.

Concerns due to rising share of Personal Income Tax and Indirect Tax:

• Impact on Middle and Lower Income Groups: The rising share of personal income tax and indirect taxes places a greater burden on poorer citizens and the middle class. This is particularly concerning as the majority of personal income tax filers fall within the ₹1 lakh-₹5 lakh annual income bracket, indicating that middle-income earners are disproportionately affected.
• Comparison with BRICS Economies: Data comparisons with BRICS economies reveal that India’s effective personal income tax rate is among the highest. This suggests that individuals in India may be facing relatively higher tax rates compared to their counterparts in other emerging economies.
• Concern for Equity and Economic Stability: The data underscores a growing concern regarding the equitable distribution of the tax burden. The heavier reliance on personal income tax and indirect taxes may exacerbate income inequality and strain the finances of middle and lower-income households.

Way Forward:

• Progressive Tax Reforms: Implementing progressive tax reforms can help alleviate the burden on middle and lower-income groups. This could involve revising tax brackets and rates to ensure that higher-income individuals contribute proportionally more to tax revenue.
• Enhanced Direct Tax Compliance: Improving direct tax compliance measures, such as increasing tax enforcement efforts and reducing tax evasion loopholes, can help enhance revenue collection from high-income individuals and corporations.

Mains PYQ 

Q What is the meaning of the term ‘tax expenditure’? Taking housing sector as an example, discuss how it influences the budgetary policies of the government. (UPSC IAS/2013)

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