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Which tax is better, Direct or Indirect?

Surendra Mehta, CA, IBJA

Indirect taxes are things like duties and GST. These kinds of taxes insidious they are buried in the cost of goods and services. You never really know exactly how much total tax you are paying in a year. The pain of these taxes is spread out in dozens or hundreds of small transactions.

Indirect taxes also tend to be regressive, meaning that they impact the middle and lower income folks more than they hurt the higher income people. “Conservatives” and wealthy people always love these indirect taxes. Indirect taxes typically result in an overall lower tax burden to wealthy people, since they spend a smaller percentage of their income than the rest of us. They also tend to make the cost of what we entrepreneurs sell be larger, and may result in a margin squeeze as we attempt to minimize their effect in the competitive marketplace.

Direct taxes, such as income taxes are progressive taxes, meaning that as your income and wealth increases, so does the tax rate. The argument for these taxes is pretty straightforward, you have more, you can pay more and those forms of taxes tend to discourage the concentration of wealth and income tends to result in the disintegration of a democratic society as the middle class evaporates.  Those who are wealthy, control the media, and have the ears of politicians will always find cause for the imposition of tax schemes which are beneficial to their interest. Thus the public dialog will be distorted and unreliable. And of course, remember the primary objectives of any taxation scheme are to “extract as many feathers from the goose with the minimal amount of hissing”. Taxes buried in the cost of goods, collected by transaction, a little at a time are the best way to accomplish this goal.

The trend for government to raise more revenues through indirect taxes seems set to continue. The spread of good and services tax is continuing at a rapid pace across the world and the design of these taxes is constantly under review where already in place.

However, India has adapted to a unique tax structure. Out of the total population of 130 crore only four crore people are paying income tax. This is hardly 3% of the total population paying income tax. The Indian government have tried their level best to increase the number of income tax payers. However, not much has been accomplished in this regard as India being predominantly an agricultural economy and the same being tax exempted.

Thus government was interested in implementing a tax mechanism whereby every person is taxed depending on his consumption pattern and not on his income pattern.

After 17 years of debates on the goods and service tax i.e. GST, was finally thought to be as an effective mechanism, to collect indirect tax based on consumption pattern. I have closely monitored the GST rates on various items and I have noticed that GST rates are nil or lower for agriculture and food products, moderate for normal products and higher for luxurious products. GST rates for almost 11,000 products were decided by GST council based on this formula. It was surprising that there was more outrage for effective GST implementation than for the rates. It clearly means that GST council have decided fair GST rates in the country. Though the council have always stated that the rates will be further lowered as the tax collection increases.

Less than one crore business enterprises applied for GST registration in the total population of 130 crore. This was mainly due to the fact that the threshold limit of rupees 20 lacs was kept for registration under GST. with the introduction of composition scheme under GST business enterprises with less than rupees one crore turnover will indirectly not claim input credit under GST. GST council also published a data that out of total registration of 90 lacs under GST about 95% of tax collection comes from only 4 lacs assesse.

Though GST is yet to be effectively implemented the collection figure of almost 90,000 crore rupees every month shows how government has effectively collected tax through this new GST mechanism.

But, Indian government was also aware that GST shouldn’t benefit wealthy individual and business man and hence kept effective checks on them through direct tax mechanism. To everyone’s surprise the income tax assesse have rose from 4 crore to 6.2 crore in last two years. I am sure linking of GST with income tax will bring more checks on direct tax evaders’ whether they are business man or consumers.

I am sure in the next two years the number of income tax assesses will increase from 6.2 crore to 10Crore with the help of data analytical tools of GST. This will not only help government to reduce the rates of GST but also to reduce the income tax rates for wealthy community.

The GST rates of 3% on gold apart from 10% custom duty on import of gold is definitely higher but I am sure this will be reduced in phased manner as soon as government starts generating more revenue through GST on gold. The economic survey report published by government clearly shows that gold is subsidised demerit goods in the country, GST rates of 3% on gold were blessing in disguise.

The financial crisis had made countries look very carefully at the composition of their tax revenues. Governments have also argued about the best way of introducing austerity measures. In particular, should rates of taxes tried to consumption be reduced to help taxpayers by increasing disposable income or increased to garner much-needed tax revenues? The International Monetary Fund (IMF), the Organisation of Economic Cooperation and Development (OECD) and the European Commissions all promote the shift from direct to indirect taxes to help solve the crisis, by reducing costs on business to make them more competitive. 

With organisation under increased pressure from regulation and compliance requirement, it is essential that organisation processes become more efficient and streamlined.  Unless companies consider the make-up of their tax bills in future, they won’t be geared up with the right system and resources to manage them effectively. It may require some fundamental rethinking of the organisation structure of each bullion dealer and jeweller to be in line with government compliances.

Disclaimer: Views are personal and not the views of the publisher.