Taxation and development

    Almost all the countries of the world today have adopted a mixed economy and the State plays at least a limited role in the welfare of the people. Income redistribution has become one of the core activities of the government and taxation is one of the tools used in income redistribution.

    The proceeds of the tax are used in various developmental activities like infrastructure development of road, rail or shipway. Some part of it may also be used for subsidising some of the basic amenities to the poor. So basically taxation acts as a sort of equaliser by guaranteeing the poor a basic minimum dignity of living. When there is too much taxation in the economy, the individual liberty to grow is effectively curbed and under taxation leads to exploitation and the suffering of the poor. Over taxation acts as tax terrorism and under taxation does not support inclusive development. Hence there is a need to find an equilibrium in the taxing rate keeping in mind the class and income levels.

    In India, according to a 2016 report, the top 10 % of Indians earned 55 % of the nations income which implies that 90 % of the people earned only 45 % of the nations income ! This shows the glaring inequality in the development process in the world’s 5th biggest economy. How are we to expect inclusiveness in the face of these circumstances ? The large income earners have a moral obligation to pay proportionate tax to the country for offering them avenues to grow over others. Opportunity comes with responsibility. Taking advantage of the opportunity and forgetting the responsibility is like forgetting to take care of their own parents during old age. It becomes a betrayal to the country. Many of the rich and high net worth individuals are always in the search of escaping the tax. They spend more money on the means to evade the tax than pay it ! This attitude must change and government also has a role to play in it by recognising and rewarding the honest taxpayers.

    Basically there are two types of taxes, direct and indirect. While direct taxes are imposed on the income earned (like income tax) cannot be passed on to someone else, indirect taxes are imposed on almost all goods of daily consumption (like GST) and is finally passed on to the customer. Direct taxes help in curbing inflation and maintaining the socio-economic balance in the economy. Most of the indirect taxes today are combined under GST. While GST has been effective in reducing the cascading effect of indirect taxes, it has a long way to go in reaching global standards. In India, almost 2/3rd of tax revenue are accrued from indirect tax and 1/3 rd from direct taxes. This is in stark contrast to global best practices where the direct tax is actually greater than indirect taxes. What it implies is that India is overburdening the poor and the middle classes with indirect taxes on their daily consumption. The rich do not feel the brunt of the indirect tax as it is peanuts for them and they happily evade direct taxes. For the country to grow inclusively, the indirect taxes have to be normalised so that even the poorest of the poor can afford to live in a dignified manner, increase the share of direct taxes, increase the tax base based on income slabs and penalise tax evaders.