India has a population of 130 crores, however, as per records, only 3.9 crore Indians, i.e., only 3% of the country’s population pays direct taxes, and the rest of the population does not pay them either because of ineligibility or unwillingness to pay taxes. Subsequently, India ranks even below countries like Thailand and South Africa in tax paying population to total population ratio. This causes a considerable per capita economic burden for handling the economy. In other words, three people are paying taxes equivalent to taxes for 100 people.
Basis my research, one plausible solution is the elimination of the concept of direct tax. We need to eliminate all forms of direct personal taxes and constant maintenance of corporate taxes. This should be coupled with the increment of indirect taxes to equate the net government revenue that was earlier derived from direct taxes. Maintenance of import duties, excise duties, etc. should be maintained at current rates of application. Also, discriminative application of indirect taxes, suggesting that goods and services that accommodate independent consumer expenditure would be taxed marginally or can be completely tax-free. Accordingly, as things get more expensive or ‘luxurious,’ those goods and services can be charged at a subsequently higher tax rate.
In India and other developing economies, where, the portion of unorganized sector against the organized and formal sector is comparatively higher, the prospective revenue of the government that is lost to non-payment of eligible tax bearers, can be recovered merely by using a more expenditure and consumption based tax. Since we are keeping autonomous expenditure based goods and services non-taxed, the people who were ineligible (low-income households) for paying taxes will not bear them. Thereby, income parity can be easily established.
If a person earns Rs. 5,00,000 per annum, as per existing laws, he is taxed about 10% of his income, i.e., Rs. 50,000. If the same man purchases movie tickets, let’s say, for Rs.200, he is taxed an additional 28% of GST on the ticket, which means he is spending a total of Rs. 256 for watching the movie. It implies that his propensity of expenditure for watching the movie is 5.68×10^(-4). Subsequently, if his disposable income remains stagnant at 5,00,000 per annum and instead of taxing him 28%, we charge him 40%, his propensity of expenditure for watching the movie will be 5.60×10^(-4). If we compare, he saves around 15.6% while making the same expense under this new method. Since, savings have increased, capital formation increases which leads to greater amount of induced expenditure. Thus, the implementation of this reform will boost consumption.
The secondary benefits include a reduction in governments expenditure on recruitment of the people for filing taxes and an increase in government’s treasure, leading to a reduced debt burden and greater availability of reserves for capital expenditure of the government. The government will have more control over adverse economic situations like over inflation and deflation as they will have greater control over market prices consequently leading to guaranteed income parity.
Even though this policy might look good on paper, it is not bereft of its challenges. Political motives might not go in line with this plan since, this will account for an extreme amount of inflation on implementation which can range from anywhere between 10%-25%, consequently dropping to normal levels in the forthcoming quarters. However, people would critique a government over these numbers. There exist a challenge upon how to determine taxes on those goods and services that fall under the category – one’s needs and other’s desire like Air Purifiers, Smart phones, etc