Tax and More Taxes: The Beasts of Burden

Published on: Sept. 28, 2020, 5:51 p.m.| Last on Updated : Feb. 2, 2021, 5:56 a.m. UTC TIME ZONE

Summary


Indian taxation philosophy is primarily driven by the assurance and ease of tax collection. Collecting taxes from certain items (beasts of burden) is very easy for tax collectors and these items assure full tax compliance. 


Indian taxation philosophy is primarily driven by the assurance and ease of tax collection. Collecting taxes from certain items (beasts of burden) is very easy for tax collectors and these items assure full tax compliance.  

The ease of tax collection makes it implied for the tax collectors to focus more towards these beasts of burden. These beasts of a burden every time become subject of discussion for improving, tweaking and remodelling with the sole aim of collecting more taxes. The simple reason for giving undivided attention to certain tax items is administered control of tax collection with the least chances of slippage.

The analytical proofs with reasonable assumptions ahead prove the same. Out of the “beasts of burden” I had chosen five leaders of the pack to justify the above analogy. Below mentioned items provide the bulk of contribution to the exchequer. The table below shows the summary view.

tax collection summary

In the preceding post, I had explained the philosophy of the Indian taxation system and stated the top items contributing to the exchequer.

This writes up, will focus more on justifying the stated analogy with data and simple additional analysis. Let us first understand the aerial view of the taxation structure and then understanding the specifics.

As recent as the financial year (FY) 2017-181, the total tax revenue collected jointly by centre and state was rupees 3,00,09,434 crores. Tax in India is subdivided into direct and indirect taxes. Tax on salary is part of direct taxes. Taxes on petroleum products, stamp and registration fee on the property transactions, taxes on vehicle, taxes on alcohol and GST are part of indirect taxes. Total direct taxes collection in year FY 2017-18 was rupees 996,185 crores and total indirect taxes collection was rupees 2,015,743 crores in the same period.

Now let me discuss items from the previous post. Taxes on salaries was the first item in the previous post. I mentioned Salary as the high tax puller towards the exchequer. It is an important part of the income tax on an individual. It is the genesis of the idea to make the collection easily monitored and tapping more sources like these. Now let us broadly assess various money earning sources for an individual. Sources are the following:

  1. Salary Income
  2. House Property Income
  3. Business Income
  4. Long Term Capital Gains
  5. Short Term Capital Gains
  6. Interest Income
  7. Other Sources Income

 

For 2017-18 fiscal, the tax collected from individual taxpayers was rupee 317,845 crores. Closely observing the share of each income head in below table we can safely say that the bulk of taxes are paid by salary income earners which automatically proves the other aspect of it being the major contributor because if its inherent quality of being easily tapped and monitored. On the hind side and with normal logic of risk being rewarded the maximum, business owners should be earning the same amount of money or more? Isn’t it? Well, technically yes but normal practical parlance depicts the inverse. The income from the business is small. Why? The answer is simple; businesses have a lot of justifiable options to underreport his income. It is needless to mention the supreme, efficient and full-proof ways of doing the same but to mention some of them, like showing personal expenditure to business expenses, hiring family member as staff are some of the many being used. Whereas on the other hand, to prove the analogy, salaried income has no or minuscule of the chance to underreport his income, barring some reasonable exceptions of claiming a trip expense to Kashmir via LTA.

Income tax in India is progressive, i.e., a higher tax rate on a higher-income slab. Due to progressive taxation policy, we can reasonably say that the share of tax on salary income would be close to 75% of the total tax paid by individuals. The tax paid by salary earners would be rupees 240,000 crores. 8% of taxes are collected from income tax on salary income.

income head

Taxes on Petroleum Products

Petroleum products are also a cash cow for the government. It won’t be unfair to mention that it does not even make the vehicles run but also the economy.  It should be reasonable to mention that the Indian government runs on petrol. You will ask me how can you say that? let's see the ( INDIAN PUBLIC FINANCE STATISTICS) and Petroleum Planning & Analysis Cell (data link).

From the table below we can see the share of taxes on petroleum products in total tax. The central government gets close to 15% of taxes from petroleum products. Similarly, the state governments get 19 per cent of taxes from petroleum products. The data is from the financial year 2017-18. 16% tax revenue for India comes from petroleum products.

I think I answered your question.

Tax on petroleum products

Taxes on Property Transactions


Every time a property (land/ flat/ shop) is bought or sold government collect taxes in the form of stamp & registration fees. On flats/ shops purchased from builders, the buyer also has to pay GST of 5%. Stamp & registration fees collection in FY 2017-18 was rupees107,804 crores. Separate data for GST collection is not available. We can do an estimation for GST on the property transactions. Assuming stamp & registration fees is 7% of property value and 25% property transaction will attract GST. Assuming Stamp & registration fees collection of 100,000 crores, property transactions worth rupees 1,428,500 crores have taken place in FY 2017-18. The estimated GST will be close to rupees 18,000 crores. Share of taxes from property transactions in total tax collection would be around 4%.

Taxes on Automobile


Taxes on automobile products are also a major source of tax for the government. There two taxes on automobiles GST and motor vehicle (MV) tax. In FY 2017-18 taxes collected from MV was rupees 62,553 crores. GST collected from the automobile is not available separately. We can estimate GST collected from automobile using tax collected from MV.

Assuming 8% tax on the motor vehicle and flat GST rate of 28% on automobiles, we can estimate GST collected from automobile to be approximately rupees 220,000 crores. Total tax collected from automobiles would be close to rupees 280,000 crores. The share of taxes automobile would be 9.3% in total tax collection.

Taxes on Alcohol/Liquor


Alcohol has two taxes state excise duty and sales tax. In FY 2017-18 state excise duty collection was rupees 133,288 crores. Sales tax will be around the same amount. So total taxes collected from alcohol would be rupees 265,000 crores. It will be ~9% of the total tax collection.

tax summary

If we look at the whole tax collection scenario, tax collected from the above five sources are close to 46%. Add taxes collected from the telecom industry and financial services and the share will easily cross 50%. I have not taken into account cess on automobiles.

The aforementioned specific heads description gives us a fair glimpse of how the Indian government has wisely chosen the major tax contributors firstly by its very nature of existence and secondly by instigating the modalities of its existence with the final objective of improving the contribution towards the exchequer’s development. Now, is it fair to control such easy heads which, by its evolution and growth has been showing an increasing contribution trend and peaking to the point where various arguments have come to light? Should the business units be controlled and tightened more rigorously to be well regulated and collect more taxes? Ever-increasing higher tax percentage on petroleum products thus indirectly affecting the consumer? Expensive automobile to the point where it becomes difficult to justify the growth and development positives?

These are some of the questions and many more for all of us to answer them with prudence and to decide to whether to treat them as unfair on the part of the exchequer or to consider it a wise step to attract more collection thus assessing the redirection to be optimum or marginal of the collected tax money.

Data sources: ( INDIAN PUBLIC FINANCE STATISTICS)

 


Once upon a time per capita GDP of India was higher than China. Now GDP per capita of India is one-fourth of China's GDP per capita

Indian taxation philosophy is primarily driven by the assurance and ease of tax collection. Collecting taxes from certain items (beasts of burden) is very easy for tax collectors and these items assure full tax compliance. 

The season of tax-saving has started, those who planned in advance are already investing in tax saving mutual funds. For those who are still waiting and have not identified funds, this article is for them.