Ease and Assurance: The Core Principles Driving Indian Taxation Philosophy

_{Published on: 01 Jul, 2024 06:35}

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 philosophy underpinning the Indian taxation system is primarily predicated on the dual principles of assurance and ease with respect to the process of tax collection. This focus on assurance is designed to ensure a robust revenue stream, while the element of ease strives to simplify the operational mechanics of the taxation process for both the tax collectors and the taxpayers.

In this framework, one can observe that the collection of taxes from certain items, exemplified here by the metaphorical 'beasts of burden', presents a particularly efficient approach for the tax authorities. Such items, by their very nature, facilitate an uncomplicated tax collection process, thereby assuring a high degree of tax compliance. This makes these 'beasts of burden' a reliable source of revenue, contributing consistently to the national treasury.

The inherent simplicity and reliability of tax collection from these items implicitly directs the focus of tax collectors towards these 'beasts of burden'. These items, which may represent certain sectors, commodities or income brackets, frequently become the subjects of discussions aimed at refining, modifying, and restructuring the associated tax policies. The overarching goal of these discussions is to maximize the potential tax revenue from these sources, thereby bolstering the fiscal health of the nation.

The rationale for this concentrated attention towards certain tax items is fundamentally rooted in the objective of administering the control of tax collection in a manner that minimizes the potential for revenue leakage. By focusing on these 'beasts of burden', the tax authorities can optimize the tax collection process, curbing the chances of slippage and ensuring that all due taxes are effectively collected. This strategy thus serves to fortify the integrity of the taxation system, contributing significantly to the overall efficiency and effectiveness of the fiscal policy landscape.

The forthcoming evidence, supplemented by logical and well-founded assumptions, substantiates the aforementioned assertions. For illustrative purposes and in order to reinforce the analogy initially presented, I have selected five prominent entities from the collective group referred to as the "beasts of burden". These chosen leaders of the pack serve to demonstrate the practical applicability of the metaphor in a more concrete and relatable context.

These five chosen entities, as represented by the 'beasts of burden', are significant contributors to the national treasury. They have been strategically selected to underscore their weighty role in furnishing the majority of the revenue that feeds into the exchequer. It is their consistent and substantial fiscal contribution that distinguishes them as leaders among the pack, epitomizing the characteristics of the 'beasts of burden' as outlined in the initial analogy.

Following this discourse, a detailed breakdown of the contributions of these entities is provided. This information is presented in a tabulated format to facilitate ease of comprehension and to allow for an effective comparative analysis. The table encapsulates a summary view of the fiscal contributions of each of these entities, thereby providing a clear and concise overview of their respective roles in the national economic structure.

This tabulated presentation serves not only to highlight the individual contributions of these entities but also to underscore their collective impact on the fiscal health of the nation. By examining this table, one can gain a more nuanced understanding of the revenue landscape, as well as a greater appreciation for the pivotal role that these 'beasts of burden' play within it.

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

 

This composition is primarily intended to reinforce the previously stated analogy through the use of data and straightforward supplementary analysis. It is essential that we first establish a comprehensive understanding of the overarching structure of taxation before delving into the specifics of individual tax items.

As per recent records from the financial year 2017-18, the cumulative tax revenue collected by both the central and state governments amounted to a staggering sum of 3,00,09,434 crore rupees. In India, the tax regime is bifurcated into direct and indirect tax categories. Salary taxation falls under the umbrella of direct taxes, which are directly levied on the income of individuals or corporations.

Conversely, taxes on commodities such as petroleum products, fees incurred from stamp duty and registration of property transactions, vehicle taxation, alcohol taxation, and Goods and Services Tax (GST), all fall under the category of indirect taxes. These are taxes that are levied on goods and services, and indirectly paid by the end consumer. During the financial year 2017-18, the total direct tax collection was approximately 996,185 crores, while the total indirect tax collection was around 2,015,743 crores.

Now, let us revisit the items discussed in the previous section. Salary taxation was the first item highlighted. I cited salary as a significant contributor towards the national exchequer due to its high tax-generating capacity. As a critical component of an individual's income tax, salary plays a pivotal role in shaping the tax landscape. It embodies the principle of easily monitored tax collection, and underlines the need to identify and leverage more such reliable tax sources.

We will now embark on a broad evaluation of various income-generating avenues for an individual. These sources can be summarized as follows:

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 the fiscal year 2017-18, the revenue amassed from individual taxpayers amounted to a substantial sum of 317,845 crore rupees. Upon detailed examination of the proportionate share of each income category, as depicted in the subsequent table, it becomes evident that the majority of taxes are remitted by those earning a salary. This fact also substantiates its pivotal role as a significant contributor to the tax revenues, given its inherent qualities of being easily monitored and tapped for tax collection.

On the flip side, a conventional logic might suggest that business owners, given the risk-reward trade-off associated with entrepreneurship, should be earning an equivalent amount of money, if not more. However, in practical terms, this is often not the case. The income derived from businesses tends to be relatively smaller. The primary reason for this anomaly lies in the myriad opportunities available to business owners to underreport their income. While it is not necessary to delve into the intricate mechanisms employed to accomplish this, a few common strategies include attributing personal expenditures to business expenses or hiring family members as staff.

In stark contrast, and further solidifying the initial analogy, individuals earning a salary have virtually no opportunities to underreport their income, apart from a few negligible exceptions such as claiming expenses for travel under the Leave Travel Allowance (LTA) provision.

The structure of income tax in India is designed to be progressive, meaning that higher income slabs are subjected to higher tax rates. Consequently, it is reasonable to infer that the share of tax on salary income would constitute close to 75% of the total tax paid by individuals. This implies that salary earners would have contributed approximately 240,000 crore rupees to the tax revenues. This further highlights the fact that about 8% of the total tax revenue is derived from the income tax on salary income.

 

Taxes on Petroleum Products

Petroleum products play an instrumental role as a robust revenue source for the government, proving to be an invaluable cash cow. The statement that they not only fuel our vehicles but also keep the wheels of the economy turning is not an overstatement. It wouldn't be imprudent to suggest that the Indian government's financial machinery is significantly lubricated by the revenue generated from petroleum products. At this juncture, you may naturally question the basis of this assertion. To substantiate this claim, let's delve into the data available from the Indian Public Finance Statistics and the Petroleum Planning & Analysis Cell.

Upon close examination of the table below, which outlines the proportionate share of taxes from various sources, we can observe the substantial contribution of petroleum products to the total tax revenue. The data clearly indicates that close to 15% of the total taxes accrued by the central government are sourced from petroleum products. In parallel, state governments also derive a significant 19% of their tax revenue from these same products. These figures are derived from data for the financial year 2017-18.

It is noteworthy that petroleum products contribute to 16% of the total tax revenue for India, a testament to their substantial role in the fiscal structure of the country. It's evident that these products are not just physical fuels driving the transport sector, but also fiscal fuels that significantly drive the economy, contributing to the robustness of the national exchequer.

This analysis, rooted in empirical data, should sufficiently answer your query regarding the pivotal role of petroleum products in the Indian taxation framework and their substantial contribution to the economy.

 

Taxes on Property Transactions

Each time a property - be it land, a residential flat, or a commercial shop - changes hands through purchase or sale, the government collects taxes in the form of stamp duty and registration fees. Additionally, when flats or shops are procured from builders, the purchaser is obligated to pay the Goods and Services Tax (GST) at a rate of 5%. This interplay of direct and indirect taxes in property transactions adds another layer to the government's revenue generation.

In the financial year 2017-18, the revenue collected through stamp duty and registration fees alone amounted to a substantial sum of 107,804 crore rupees. Unfortunately, distinct data pertaining to GST collection on property transactions is not readily available. However, it is certainly possible to make an educated estimate.

To generate this estimation, we can leverage certain assumptions. Let us consider that the stamp duty and registration fees account for approximately 7% of the total property value. Additionally, let's posit that 25% of property transactions attract GST. With these assumptions, and considering a stamp duty and registration fee collection of 100,000 crore rupees, we can infer that property transactions to the tune of approximately 1,428,500 crore rupees were executed in the financial year 2017-18.

Given these premises, we can estimate that the GST generated from these property transactions would be in the ballpark of 18,000 crore rupees. This substantial amount, when viewed in the context of the overall tax landscape, implies that property transactions contribute roughly 4% to the total tax collection.

This analysis underscores the significance of property transactions in the broader scheme of tax revenue generation. It exemplifies the effective utilization of both direct and indirect taxation in a sector that sees significant monetary exchange, thereby contributing to the national treasury and ultimately, to the economic prosperity of the nation.

Taxes on Automobile

Taxes levied on automobile products constitute a significant portion of the government's tax revenue, though this reality is a matter of contentious debate. Two key taxes are imposed on automobiles: the Goods and Services Tax (GST) and the Motor Vehicle (MV) tax. However, it is important to note the fiscal burden these taxes place on consumers and the potentially detrimental impact they may have on the automotive industry.

In the financial year 2017-18, the government collected MV taxes amounting to 62,553 crore rupees. Unfortunately, GST data specific to the automobile industry is not readily available. Nevertheless, with some extrapolation and assumption, we can estimate this figure using the MV tax data.

Assuming an 8% MV tax rate and a flat GST rate of 28% on automobiles, we can predict that the GST collected from the automobile sector would be in the vicinity of 220,000 crore rupees. This estimate, while indicative, should be taken with a grain of salt due to the assumptions involved. When combined with the MV tax, the total tax revenue sourced from the automobile industry would be close to 280,000 crore rupees.

This implies that the automobile industry's contribution to the total tax collection would be a sizeable 9.3%. While this may seem like a boon for government coffers, it's essential to critically evaluate the potential negative impact this heavy taxation could have on both the automotive industry and consumers. High taxation can act as a deterrent to growth in the industry and place a substantial financial burden on the consumer, calling into question the sustainability of such a high tax regime in the long term.

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.

 

Upon a meticulous inspection of the tax collection scenario in India, we find a rather intriguing pattern. The tax revenues accumulated from just five categories—salary incomes, petroleum products, property transactions, automobile taxes, and the somewhat surprising inclusion of beasts of burden—make up nearly 46% of the total tax revenue. This share significantly swells when we incorporate tax revenues procured from the telecom industry and financial services, resulting in over half the total tax collection. It's important to note that these calculations don't even account for the cess imposed on automobiles, which if included, would inflate these percentages considerably.

This detailed breakdown of specific tax categories provides a revealing insight into the strategic choices made by the Indian government and its tax officials. The selection of these major tax contributors appears to be a calculated decision, primarily guided by two considerations. Firstly, the inherent nature of these sectors that lends itself to easy taxation, and secondly, the manipulation of these sectors' operational dynamics to maximize tax collection, ostensibly with the noble aim of contributing to the exchequer's growth.

However, it's hard to ignore a certain sense of complacency in this approach, hinting at a less than proactive attitude by the tax officials. Instead of broadening the tax base and innovatively exploring untapped sources of revenue, there seems to be a reliance on tried and tested, easily controllable sectors. This method has resulted in these sectors showing a steady increase in tax contributions. One can't help but wonder if this is fair? Should business units be under tighter control and regulation, squeezed to contribute more to the tax coffers?

The tax officials' penchant for an ever-increasing percentage of taxes on petroleum products indirectly affects the consumer, a move that invites criticism. Additionally, the taxation strategy employed in the automotive sector raises questions about its alignment with broader growth and development objectives. The sector has become so cost-prohibitive due to taxes that justifying its positive impact on growth and development becomes challenging.

These queries, and many more like them, compel us to ponder and critically evaluate the approach taken by our tax officials. We must decide if we perceive this reliance on 'low-hanging fruit' as an unfair tactic employed by the exchequer, or view it as a judicious step to boost collections. Furthermore, we must assess if the redirection of these funds towards national development is optimal, or if the contribution is merely marginal.

A balanced and nuanced analysis is essential in this regard. It's crucial to scrutinize the methods employed by the tax officials, consider their implications, and if necessary, demand a more dynamic, proactive approach. Striking the delicate balance between revenue generation and economic growth is paramount, and one can't help but wonder if our tax officials are doing enough to achieve this balance.

 

Data sources: ( INDIAN PUBLIC FINANCE STATISTICS)