How Arun Jaitley has punished taxpayers through his five Budgets
A fine is a tax for doing something wrong. A tax is a fine for doing something right. After five budgets of the Jaitley-Modi economics, this could be an apt statement for India's taxpayers under the direct and indirect taxation net. The hit-and-miss taxation strategies introduced in Budgets presented over the years turned India into a nation where honesty is now taxed more than ever. Even the widening tax base has not resulted in reduced taxation.
With a record taxation of over Rs 90,000 crore (Rs 31,000 crore in direct taxes and 60,000 crore in custom duties) in the Budget 2018, subsequent to the increased tax on goods and services under GST, India can now brandish itself as a tax tormented economy along with a lingering economic slowdown.
The last Budget of Modi government is a bizarre report card of an inconsistent tax economics of last five years. While the government has offered three big (failed) amnesties to tax evaders, the honesty of taxpayers or widening of tax base has not resulted into reduced taxation. The most cherished indirect tax reform - GST - not only yielded in increased taxation and complications but also forced the government to invent a new generation of opaque cess and surcharge to cover up the revenue losses. GST's derailment has also compelled the government to significantly increase basic custom duties which may sharply fuel the cost of imports and production and lead to high inflation.
The taxation trajectory of NDA government's Budgets had been clearly inclined towards higher revenue mop up. In the last five years, Jaitley's Budgets unleashed new taxes to the tune of approximately Rs 1,33,203 crore, an average of Rs 26,000 crore per annum. He offered exemptions of Rs 53,000 crore during the same period at an average of Rs 10,000 crore per year. The Budgets of FY 2014-15 and FY 2017-18 were soft on taxpayers while the other three budgets took recourse to heavy taxation. In terms of taxation, Jaitley's last and pre-election Budget (2018-19), surprisingly, is the most lethal among his five creations.
Tax base vs tax rate
The honest middle class taxpayers have valid reason to complain about NDA government's tax economics. The tax base (inclusive of TDS and advance tax by those who don't file returns) increased from 6.47 crore at the beginning of FY 14-15 to 8.27 crore at the end of FY 16-17. In his budget speech, finance minister swanked on how increasing the tax net has allowed him to collect an increased revenue of Rs 90,000 crore during the last two financial years -2016-17 and 2017-18.
However, increased tax base and revenues have not resulted into rewards. In fact, middle class taxpayers got a rough deal from Modi government, which pampered tax thieves through repeated amnesties.
The GST has also helped in widening of indirect tax base. As of December 2017, there were 9.8 million unique GST registrants, slightly more than the total indirect taxpayers under the old system. But the two numbers are not comparable as registrants in the old system were not unique, since many taxpayers were registered under several taxes. Adjusting the base for double and triple counting, the GST has increased the number of unique indirect taxpayers by more than 50 per cent, a substantial 3.4 million, says the Economic Survey of 2018.
Many new taxpayers have voluntarily chosen to be a part of the GST, especially small enterprises that buy from large enterprises and want to avail input tax credits. However, GST's erratic implementation and sharp increase in custom duties goes against the enthusiasm of indirect tax payers.
Killing the golden goose
In the past four years, the burgeoning middle class of small towns has bolstered the Indian stock markets by investing in mutual funds and thus creating the much-desired small investment revolution. This comes as the biggest success of Modi era. It has moved people away from the black money-driven investment in gold and real estate.
However, the final budget of NDA has killed the golden goose by levying long-term capital gains tax on equity investment and dividend distribution tax on mutual funds. The fresh wave of taxation on financial investing and subsequent fall in markets may force small investors to turn back to gold or real estate investing.
The GST tragedy
Although the government has mellowed the GST flaunt after its debacle and rollback, the GST took a heavy toll on government finances and triggered the return of retrograde taxation. Budget 2018 staged a major departure from the previous trend on reduction of customs duty, which was in line with the World Trade Ooganisation obligation. The significant increase in customs duty rates is targeted to garner revenue worth Rs 60,000 crore to offset the loss in GST revenue.
The GST debacle has also brought the cess and surcharges back into the picture. GST was expected to end the cess raj, however, falling revenue and state compensation that is due to be paid forced the central government to increase education cess and levy new cess, which are not being shared with the states. The one per cent increase in education cess on income and corporate tax will result in an estimated revenue of Rs 11,000 crore during the FY19.
Jaitley's passion for cess is no secret. Before the introduction of GST, he not only continued with education cess on income tax but levied Krishi Kalyan cess and Swachh Bharat cess on service tax. He also imposed a cess on automobiles. However, over the last three years, the government has never explained where the proceeds of cess on cleanliness and agriculture were going.
Cess is not a tax per se. This can well be called an obscure layer of indirect tax. It is imposed for one stated purpose, but used for another. As the cess collection goes beyond the shared tax pool of the Centre and the states, the latter has all the reasons to complain.
The five years of Jaitley's tax economics has invented a new doctrine of taxation, under which tax reforms and better compliance are not guarantees for lesser taxation. Tax reforms in fact can produce new taxes and more inspectors. As Will Rogers said, be thankful we're not getting all the government we're paying for.