Let us focus on a few popular misconceptions or less known facts about fiscal policy in India.

First, many people belonging to the so-called ‘middle-class’ complain that while they pay taxes, the poor don’t but still get all the subsidies from the government. This is not true. The poor people pay all kinds of indirect taxes like GST, excise tax, sales tax while they buy a branded soap or a tube of toothpaste or medicines or recharge their cell phones every month or pay bus fares which get inflated by all kinds of indirect taxes imposed by both central and state governments on petroleum products.

Second, all rich people do not necessarily pay income tax. Rich farmers in India do not have to pay any taxes on the so-called ‘agricultural income’. By contrast, salaried people for whom taxes are deducted at source have no way to evade paying income taxes. However, even here, an individual, under the current income tax rates and exemptions, can earn around ₹7.5-8 lakh a year without paying any income taxes by making use of various tax deductions. That means, a family consisting of a husband and a wife can earn up to ₹15 lakh of income per annum (which, by no stretch of imagination, can be considered a non-affluent family in India) without paying any income tax.

A regressive tax regime

Third, tax collections from indirect taxes like GST, customs duties, sales taxes and excise taxes are becoming more and more important relative to tax revenues raised by direct taxes like personal income tax and corporate profit tax. Since the indirect tax rates are the same for everybody irrespective of income level, the Indian tax system is becoming less progressive over time.

Fourth, even if the tax exemption limit and the tax rates for different income tax brackets are not changed (as in the last Budget), the income tax payers end up being adversely affected in an inflationary situation. Suppose prices go up by 10 per cent and everybody’s money income also increases by 10 per cent, real income remains the same. Yet, people would be moving to higher income tax brackets and would have to pay a higher percentage of the unchanged real income as taxes.

Fifth, some people wonder: why does the government prefer to spend more money on infrastructure development instead of giving tax benefits or putting more money directly in the hands of the people to spend? There are several possible reasons.

One, economic theory tells us that additional government expenditure has bigger effect on aggregate demand than equal reduction in tax revenue. So, with the same level of budget deficit, it makes sense to rely on additional government spending rather than tax cuts to created demand.

Two, spending on infrastructure projects (like building roads, ports, bridges, airports, power stations) creates demand through productive job creation instead of doles. True that more money transferred to the poor by taxing the rich would increase net aggregate demand as the poor have a higher propensity to consume.

In addition, the effect would be more immediate since it takes time for new infrastructure projects to get started. But it would not create new national assets. On the other hand, better physical infrastructure is expected to attract more private investment which, in turn, would expand the productive capacity of the nation in future. The long-term trend growth rate of an economy depends on the growth of production capacity rather than the growth in aggregate demand.

Sixth, many media commentators express dismay over the huge shortfall in achieving the target of disinvestment proceeds. Here, we need to understand the distinction between strategic sale (that changes management and control, as in the case of Air India) and mere equity dilution (by selling some PSU shares). If strategic sales are not possible (because no strategic investor is forthcoming), it may be a better idea to wait rather than hastily sell some PSU shares at existing prices to present a better fiscal deficit number. The focus should be on efficiency improvement through disinvestment rather than raising money for the government.

Lastly, some tax concessions do not bring benefits to the most intended beneficiaries. For example, all buyers of health insurance have to pay GST at a high flat rate of 18 per cent. Under 80D, they can deduct the premium payment including the GST (up to some maximum limit like ₹50,000 for senior citizens) from taxable income and thus get a tax benefit.

But, consider the case of a low-income senior citizen whose taxable annual income falls below ₹5 lakh. Under the current tax regime, he does not have to pay any income tax but will still have to pay the 18 per cent GST on health insurance premium without getting any tax deduction. But a rich person with marginal income tax rate of 30 per cent plus surcharge would enjoy a significant tax benefit.

The writer is a former Professor of Economics, IIM, Calcutta, and Cornell University, US

comment COMMENT NOW