All Fuss for an Indirect Tax

It has been more than a decade since the idea of a holistic indirect tax was pitched. After a considerably long time of deliberation and significant compromises, a newly envisioned Goods and Service Tax (GST) will make its way into the records from the first of July. The last one year has witnessed a significant amount of literature devoted to the phenomenon what is now GST. But as happens usually in India questions which ought to be asked was never raised and when sounded was drowned in the clamor of what should be the right tax rate for GST.

Fundamentals:

To understand the right questions we are obliged to revisit the fundamentals of taxation. Tax is a compulsory levy by the government for the services it provides to its citizens from security to sanitation. The government decides the different levies through which it can raise its revenue. The fundamental classes of taxes are two – direct and indirect taxes. Direct taxes are progressive in nature they are levied in proportion to your income or wealth. Hence when direct taxes are increased people with more purchasing power pay more, simply put it taxes the rich. Indirect taxes on the other hand are regressive in nature. A standard example would be the excise duty levied on petrol and diesel. Irrespective of whether the commodity fills a TVS Excel or a BMW the tax on the commodity remains the same which has an increasing burden on the poor.

India's tax scenario:

India has a low tax to GDP ratio i.e. the amount of revenue it is able to generate through taxes in comparison to the size of the economy. Further, the percentage of Indians who pay tax is a mere 3%. GST is envisioned as a methodology to improve the tax revenue for the government. The important point forgotten in translation is that GST is an indirect tax reform which taxes the poor more when compared to the rich.

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Wealth Tax:

There are plenty of economic theories which are propounded by the enlightened economists of the liberal Western world. One among them is that introduction of the reforms in the indirect tax regime will enable the government to garner more revenue. But they rather would not talk much about a significant point which was thoroughly discussed by Thomas Piketty French economist who wrote the ground-breaking Capital in the 21^st Century.

His work analyzes the history of capitalism for the last 200 years and arrives at a conclusion that Capitalism is unsustainable. He argues with meticulous data that when the rate of return on capital (returns from wealth) is greater than the growth rate (which decides the growth of income of the general population) individual effort becomes useless and what matters at the end of the day is only the amount of wealth one possesses and not individual action. Simply put, wealth sterilizes individual effort. What would matter is the amount of wealth you possess.

One of the significant proposals in his book to counter this trend was levying higher ‘Wealth tax’ which would tax inheritance of the super-rich. There will be arguments that it was only through their individual efforts and pain that they were able to amass wealth. This is where the infrastructure and security which the government has provided them to achieve success if forgotten. Increasing Wealth tax, a direct tax is a necessary reform which could directly work in reducing inequality in India. On the other hand, the GST council is arguing that though GST is an indirect tax they are taxing essential commodities at a low rate. Common sense tells you to whom governments work for.

Lost in the woods:

The GST which is to be implemented is not an ideal one either. It has two components one for the State and one for the Centre. Further commodities like petroleum and alcohol are kept out of the tax regime. It is alleged the proposed regime is to mimic the existing taxation procedures to the maximum so that there is minimum fall (in worst cases) in the revenue. After implementation discussions will be about making the GST better and significant reforms will fade into oblivion again, again and again. 

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