The Indian tax system has been regressive for long with direct tax contributing less than indirect tax – contrary to what happens in developed economies. It is also known that tax incentives benefit corporates making higher profits than those who make lower. Both turn the cardinal principle of ability-to-pay or equity in taxation.
The Modi government achieved a dubious distinction when, for the first time in the new GDP series of 2011-12 base, corporate tax collections fell below that of income tax from non-corporates (partnership firms, individuals and Hindu Undivided Family etc.) in FY21. The immediate cause was the drastic cut in corporate tax in the previous fiscal (September 2019) – from the base rate of 30% to 22% without exemptions for existing and the minimum alternate tax from 25% to 15% for new manufacturing units.
Corporate tax is less than non-corporate income tax
The corporate tax’s share has been falling for the past few years mainly because of the ineptitude and incompetence of the Central government, like the twin shocks of demonetization and GST, corporate tax cut and mismanagement of the pandemic. From 36.3% in FY12, the share of corporate tax in the gross tax collection fell to 22.6% in FY21. At the same time, that of income tax from non-corporate entities surged from 18.5% to 24% of the gross tax in FY21.
The fall in corporate tax in FY21 happened despite the historic profits the listed corporates declared amidst the pandemic ruins of the people and the economy (the GDP plunged to -7.3%, now revised to -6.6%). The revised estimates for FY22 shows the trend would reverse, which may be explained by the soaring corporate profits while smaller businesses, like MSMEs, are struggling to go back to the pre-pandemic level, leading to a two-paced or K-shaped recovery in the economy.
Worshipping Ambani and Adani as wealth and job creators, as suggested by BJP MP KJ Alphonse recently and by the Prime Minister and the Finance Minister in the past few years, is misplaced. No private wealth creator is or would pass on the wealth to the less privileged nor have they created enough jobs to address the chronic job crisis, which is getting worse by the day.
The Azim Premji University study of 2019, which analyzed the PLFS data, showed that India had lost 9 million jobs during 2011-12 and 2017-18, which it said had “happened for the first time in India’s history”. The Economic Survey of 2021-22 says employment rate (worker population ratio for above 15 years) fell from 46.7% in 2019-20 to 43.1% in January-March 2021 – far below the average of 67% in OECD countries. This means only 43.1% of people over the age of 15 were working in FY20 and the rest, 56.9%, were sitting idle at home because the jobs had disappeared. The pandemic worsened the crisis. Business portal CMIE found 53 million unemployed in December 2022.
This is yet another justification for taxing the rich and profit-making corporates more. They are making historic profits but their tax contribution is falling and they are failing to generate adequate jobs.
Their low contribution to tax has made the Centre to burden the poor with more indirect tax, like the GST, Excise and Customs.
High GST collection is burden on poor
Every time the Goods and Services Tax (GST) collection touches or crosses Rs 1 lakh crore mark, the Centre goes into celebrations, without it realizing that a rise in the GST regressive as both the rich and poor are taxed at the same rate.
The GST collections have steadily risen since it was introduced in July 2017 (FY18). From 23.1% of the gross tax in FY18, it’s share went up to 29% in FY20, before falling to 27% in FY21 (the first pandemic year) and is estimates to fall to 26.8% in FY22 (RE). The fall in FY22 (RE) is despite the GST collections crossing or touching Rs 1 lakh crore mark for the most part, which is reflected in a robust 23% growth of GST collection in FY22 (RE) over FY21 (actual) in absolute numbers. In FY23 (BE), its share is expected to rise to 28.3% – a growth of 15.6% over FY22 (RE).
High oil tax is direct burden on the poor
In the past few years oil taxes have gone up while crude prices crashed (Indian basket) from above $100 per barrel during FY12-FY14 to an annual average of $58.5 during the next seven years between FY15 and FY21 (prices started rising again in the last few months). But during this period, taxes on petroleum and petroleum products went skyward.
Total oil taxes collected by the Central government (by way of Customs, Excise, Cess, IGST, CGST etc.) rose from Rs 1.26 lakh crore in FY15 to Rs 4.2 lakh crore in FY21. Half way through FY22 (H1), oil taxes collected stood at Rs 1.98 lakh crore. These are the data provided by the government’s Petroleum Planning and Analysis Cell (PPAC) data.
That is, the Central government collected Rs 20.7 lakh crore from oil taxes from FY15 to H1 of FY22. Why did the government raised the tax and kept oil prices high, while the decontrolled policy regime dictates that consumer price should fall when crude price falls?
Why did the Centre raise oil tax when the crude price fell? Finance Minister Nirmala Sitharaman misled the nation by repeatedly saying that her government was burdened with high-cost oil bonds by the previous Congress-led UPA government to keep the tax burden low on people (when the crude price was going up).But that is half-truth. Firstly, the budget documents reveal that when the Modi government took over in May 2014 (FY15), the total outstanding on oil bonds stood at Rs 1.3 lakh crore. Up to FY22, the Central government has paid Rs 13,500 crore towards the principal and Rs 79,918.9 crore towards interests (at Rs 9,989.86 crore per year) during FY15-FY22. Thus, it has paid only Rs 93,418.9 crore towards oil bonds but collected Rs 20.7 lakh crore by the first half of FY22.
This is an excess of Rs 19.8 lakh crore over the oil bond outgo!
There is evidence to show that oil tax is borne mostly by the poor, who pay it while buying petrol, diesel (hovers around Rs 100 or more per litre – from much less during the previous government) and LPG cylinders (gone up to Rs 2,000-from about Rs 400 during the previous government).
A study conducted by the PPAC (through Nielsen) in 2014 showed (a) 99.6% of petrol is used by the transport sector, of which 61.4% petrol is consumed by two-wheelers and 2.3% by three-wheelers, as against 34.3% by cars (b) 13% diesel is consumed by agriculture and (c) 70% of diesel is consumed by the transport sector.
While the first (a) is a direct burden on the poor, the others (b and c) add to their costs of food and transport.
PSU disinvestment and sell offs hurt people
What Sitharaman didn’t disclose while blaming the high oil tax on the previous government is the fiscal constraints her government was facing because of its own multiple mistakes (like, demonetization, GST, abolition of wealth tax from FY16, corporate tax cut in FY20 and the gross mishandling of the pandemic crisis, which turned India into one of the slowest growing economies in the world in FY21, from the fastest growing major economy in 2015.
It cut the corporate tax even as it was refusing to pay states the GST Compensation in 2019. It has been borrowing money and loans it to states in lieu of GST Compensation, while continuing to collect GST Cess – in gross violation of the GST (Compensation to States) Act of 2017.
The net result of such misadventures was the fall in tax-to-GDP ratio from11.2% in FY17 and FY18 to 9.9% in FY20 (pre-pandemic). The budget documents show, it would rise to 10.8% in FY22 (RE) but fall to 10.7% in FY23 (BE) – far below the levels of FY17 and FY18.
This fall in tax revenue is also at the core of the Centre’s aggressive push for disinvestment and outright sale (called ‘strategic sale’) of PSUs, even the profit-making ones. The LIC IPO and excessive dividend/surplus transfers of PSUs, including the RBI (the way for which was paved by the Bimal Jalan Committee after the demonetisation failed to produce the “windfall gain” the government was expecting) are also attempts to raise fiscal resources and cut down fiscal deficit.
Such disinvestment and privatisation of PSUs hurt the interests of the poor too.
A fall in public assets means the government loses that much capacity to intervene and assist people when poverty and inequality are growing and millions have lost jobs and businesses.
For example, when a PSUs is sold off (even 51% of stakes), it ceases to be a public sector entity and stops giving job reservations to SCs, STs and OBCs. Besides, PSUs provide many social services, like reaching out to the unbanked masses through zero-balance and zero cost accounts. Since private entities are profit-driven, they can’t be expected to provide any social service (other than the paltry CSR). In fact, bank nationalisation took banking to rural agriculture and small-scale industries in a big way, which had been starved by private banks until then.