One objection raised on Arthakranti’s BTT is that it is not fair/equitable, because it taxes the rich and the poor with same flat rate of 2%, whereas current tax system has progressive slabs and applies higher tax to higher income group. In that context let’s see whether the current tax system is really progressive and fair.
Current tax system has both direct and indirect taxes. Direct tax rates are different for different income slabs (http://www.incometaxindiapr.gov.in/incometaxindiacr/home_individual.jsp?id=). Indirect taxes are of different types and have different rates on different types of commodities, exemptions etc. This indirect tax system is considered as regressive as tax is recovered from whoever consumes irrespective of his income status.
- Just because we have different rates of income tax for different slabs we think that our direct tax system is progressive, but let’s try to understand this.
- For 2012-13, combined tax receipts for central and state governments is 17, 18, 327 Crore Rupees. Out of that 10, 55, 505 Crore Rupees revenue is from indirect taxes (~ 61.5 %) and 6, 60, 511 Crore Rupees is from direct taxes (~ 38.5 %).
- Out of revenue from direct taxes 5, 70, 257 (~ 33.18 %) Crore Rupees is from Central government’s direct taxes. Out of Central government’s direct taxes, 3, 73, 227 Crore Rupees (21.72 %) is Corporation tax; 1, 95, 786 Crore Rupees (11.4 %) is Income Tax & 1, 244 Crore Rupees (0.072 %) is Wealth Tax. Out of these direct taxes, typically corporation taxes are also known to be passed on to the customers.
- So in our current tax system only small percentage of tax (income tax 11 %) is collected in progressive manner and that is paid by hardly 3% of the population.
- Because we have declaratory taxation system i.e. tax payer has to ensure all formalities and compliance required and government audits. There are different kinds of problems with this declarative system:
- First of all, the tax is collected only from those who declare their incomes and to the extent they declare. Certainly we know that many people today do not comply on this honestly and very few of those get caught.
- There are large compliance costs for tax payer, administrative costs (for government) which are later recovered from tax payers only. These costs are high for small and medium scale tax payers. This makes even direct tax system regressive.
- These costs are applicable even for complying with and paying indirect tax. There are also psychological costs to deal with tax administration. To these, if we add the opportunities of tax evasion due to complex tax structure (various rates, exemptions) and cash economy, those who have the power, capacity and opportunity to carry out and manage tax evasion will do the same.
- And then the cost of all these tax evasions and manipulations will be recovered from those who have to or chose to pay taxes honestly…Now we can ask ourselves that the system which looks fair on paper(or in theory), is it really fair in practice?
“A fair tax is one you can collect”.