Insights into Editorial: Moving Back to a Regressive Tax System + MINDMAPS on Issues
23 November 2015
The union government has decided to impose a 0.5% Swacchh bharat cess on all services. The proceeds from swachh Barat cess will be used for Swachh Bharat initiatives.
- A provision for levying a Swachh Bharat cess on all or any of the services for the purpose of financing and promoting Swachh Bharat initiatives was made in the Union Budget for 2015-16 by the Finance Minister Arun Jaitley.
- The government estimates that with the increased allocation for Swachh Bharat Abhiyan, consequent to the collections from the cess, it will be able to prevent diseases. At present, an estimated Rs.6,700 crore or about Rs.60 per capita is spent annually on health.
Indian tax system- pre 1991 era:
- Socialist India, from 1940s to 1990s, had one of the most regressive tax regimes in the world.
- Almost 80% of the total tax collected by the government came from indirect taxes. Indirect taxes are often considered regressive because their burden is shared by citizens irrespective of income.
- Thus, regressive tax system was said to tax the poor even while pretending to serve them.
Reforms since 90s:
From the early 90s, one of the key goals of all successive governments was to make the tax system more progressive by increasing the importance of direct taxes.
- With more moderate tax rates, a cleaner tax system with fewer exemptions and better tax administration, tax system in the country became more progressive.
- With corporate taxes leading the increase, the share of direct taxes in the total kitty steadily went up over the years.
- A milestone was reached in fiscal year 2009, when the share of corporate taxes became higher than the share of indirect taxes, for perhaps the first time in our fiscal history.
- Thus, the Indian tax system finally became more progressive.
However, according to few experts, some recent initiatives by the government are making the Indian tax system again regressive. Few studies have showed that the share of indirect taxes have gone up by 6% since fiscal 2010 while the share of direct taxes began to come down by the same proportion. Indirect taxes also grew by 36.9% in the first seven months of the current fiscal year, partly because of the pick-up in economic activity but largely due to higher tax rates.
Main Factors responsible for this:
- Sluggish growth in corporate taxes as a result of the pressure on profits in recent years.
- Recent tax decisions by the government- education cess on income, road cess on petroleum products, higher education cess on services, and clean energy cess on coal mining.
- The finance ministry’s dependency on indirect tax hikes to support its revenues. The latest budget numbers for this year show a robust growth in indirect taxes compared to sluggishness in direct tax collections.
How is cess regarded in India?
- Cess is regarded as a lazy tax in public finance. It may be easy to collect, but it is regressive and imposes an additional burden on the poorest section of taxpayers.
- As cesses are levied on top of the battery of indirect and direct taxes, they feed directly into the costs of doing business in the country.
- Also cesses seldom function as they should — as temporary taxes clearly earmarked for a specific purpose. Once imposed they are revised, hiked and shifted around, but seldom discontinued.
Even the Direct Taxes Code of 2009 and the Economic Survey of 2014 have recommended that the Centre do away with ‘bad taxes’ such as cesses and surcharges.
Why states are not happy with the new cess?
- Unlike taxes collected by the central government, cesses and surcharges are not part of the divisible pool that is shared with state governments. And hence, states have every reason to be suspicious of this new and sudden change. The new cess also goes against the idea of fiscal federalism.
The Swachh Bharat cess has been justified on the count that it is “not another tax, but a step towards involving each and every citizen in making a contribution to Swachh Bharat”. But a new tax is hardly the way to achieve this. What we really need is greater civic sense on the part of every citizen, backed by grassroots initiatives such as door-to-door garbage collection, segregation at source and greater priority to waste management systems in our cities, villages and towns.
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Environmental (Amendment) Law 2015