Skip to main content

Rich-Poor Divide Widens as Centre Shies Away From Progressive Taxation

Regressive changes like the abolition of the wealth tax have increased the dependence on indirect taxes.
eco ineq

Representational use only.

At a time when there is a renewed global emphasis on taxing the rich more to raise enough resources for meeting the essential needs of the poor, India is moving away further from progressive taxation—especially in the last eight years of the National Democratic Alliance (NDA) regime.

The Budget Estimates (BE) for 2020-21 had pegged the gross tax collection at Rs 24.23 lakh crore, which was slashed to Rs 19 lakh crore in the Revised Estimates despite the increase in petrol and diesel duty in March and May 2020.

The government attributed the reduction in the tax collection estimate to COVID-19 in 2020. However, tax collection has started declining in the previous financial year. From Rs 20.80 lakh crore in 2018-19, the number had reduced to Rs 20.10 lakh crore in 2019-20.

Noticeably, the Centre had reduced the BE for gross tax collection for 2021-22 to Rs 22.17 lakh from Rs 24.23 lakh crore in 2020-21. Clearly, the government was shying away from the responsibility of raising resources in a big way to help the poor, who were the worst affected during the pandemic.

The NDA government has been surrendering its options of raising more resources. The 2015 Budget abolished the wealth tax. In September 2019, the Lok Sabha passed the Taxation Laws (Amendment) Bill, 2019, to reduce the corporate tax from 30% to 22%, a decision which, even according to official estimates, suggested could lead to a loss of about Rs 150,000 crore in one year in terms of availability of resources. What was the tearing hurry to reduce the corporate tax, which further eroded the resources urgently needed to help the poor, in the middle of the year was never clear. The 2020 Budget abolished the dividend distribution tax.

Such regressive changes have increased the dependence on indirect taxes, which is shared more equally by all people as opposed to direct taxes, which specifically target the rich and the superrich. However, even in the case of indirect taxes, it is possible to target the rich more to a limited extent.

The government has been increasing the excise duty on fuels, whose burden is shared directly and also indirectly in the form of increasing prices of a wide range of items of daily use whose transportation cost increases.

The government has also taken other measures that benefit corporate entities, resulting in low tax collection. For example, the International Financial Services Centres (IFSCs) Authority Bill, 2019, deals mainly with customers outside the jurisdiction of the domestic economy. It provides for the creation of an Authority that would develop and regulate the financial services market in IFSCs. India set up its first IFSC in the Gujarat International Finance Tec-City (GIFT City) in Gandhinagar, Gujarat. GIFT City has been ranked tenth in the Global Financial Centres Index.

In its review of the IFSC titled ‘Decoding the Priorities: An Analysis of Union Budget 2020-21’, the Centre for Budget and Governance Accountability (CBGA), Delhi, said: “The IFSC enjoys numerous tax concessions such as tax holidays to firms operating in the IFSC along with exemptions on transaction taxes and stamp duties. Capital gains tax does not apply to a transfer of derivatives and certain securities by non-residents in a stock exchange established in the IFSC, including transfers received in foreign currency.”

Explaining the risks posed by speculative investment, the CBGA said; “The IFSC incentivises instruments and activities related to speculative investment, which is of great concern for the Indian economy as it can potentially hamper the country’s macroeconomic indicators, such as GDP growth rate and employment growth rate. Furthermore, this has significant impacts on the government’s revenue as the IFSC provides for substantive tax exemptions and tax holidays which may be used for tax abuse.”

In another review in 2022, the CBGA noted the government’s continued shift in the international taxation policy. “There already exist incentives on capital gains, stamp duties, transaction taxes, and other levies at the IFSC—all aimed at stimulating investment, including in short-term and speculative forms.”

The increased incentives “include exempting any investment division of a foreign bank from taxation, incentives for relocating foreign funds as well as complete tax deductions for companies dealing with aircraft operations registered at the IFSC”, the CBGA noted.

“This, along with the reduced corporate tax rate, the abolition of the Dividend Distribution Tax, the tax holidays and capital gains deductions from start-ups, and the incentives for infrastructure investment for foreign Sovereign Wealth Funds and Pension Funds, represents the continued shift of the international taxation policy.”

Various studies have drawn attention to the unprecedented number of Indians being pushed into poverty in recent times, which has also been confirmed by United Nations data. At the same time, inequality has also spiked with the biggest increase in the number of billionaires and the concentration of wealth in their hands so far.

The pandemic warranted more taxes on the rich to help the poor. However, the government has provided more fiscal concession to the rich and the superrich.

The writer is Honorary Convener, Campaign to Save Earth Now. His recent books include ‘Planet in Peril’ and ‘Man Over Machine’.

Get the latest reports & analysis with people's perspective on Protests, movements & deep analytical videos, discussions of the current affairs in your Telegram app. Subscribe to NewsClick's Telegram channel & get Real-Time updates on stories, as they get published on our website.

Subscribe Newsclick On Telegram

Latest