Centre’s reliance on indirect tax revenue, pro-rich policy, has deprived govt of resources during COVID crisis

 The Indian government's tax strategy has been troublesome for two reasons. It has not only been pro-rich (and anti-poor), but it has also depleted the state's fiscal resources, both of which are particularly harmful in the context of the COVID crisis.

The Narendra Modi government pulled back the increase in surcharge in 2019 after repealing the wealth tax in 2016 and replacing it with a 2% surcharge on super-rich individuals (taxable income of over Rs 10 crore). More crucially, corporate taxes were reduced from 30% to 22% in order to entice foreign investors and encourage Indian businesses to invest.

Simultaneously, reliance on indirect taxes has increased, a tendency that began in the middle of the UPA administration. Because the Modi government has become increasingly reliant on raising cesses and surcharges, indirect taxes now account for up to 50% of gross tax collection in FY2019, compared to 43% in FY2011. Customs and excise charges, as well as value-added tax, made up an all-time high of 10.5 percent of GDP, surpassing the previous record of 10.1 percent in 1987-88. This milestone came after a three-year steady rise in customs or excise duty on regularly used goods including fuel, metals, and sugar, as well as autos and consumer durables. This was also the year that the service tax was gradually increased from 12.4 percent in 2014 to 18 percent (under GST). This is concerning since indirect taxes disproportionately affect the poor and middle class. Another example is the inclusion of new cesses to GST, such as the Swachh Bharat cess and the Krishi Kalyan cess. The CAG has criticized the lack of openness and insufficient reporting in reports on the utilization of sums collected under cesses, citing the states' opposition to the permanent character of these cesses.

While indirect taxes are anti-poor, corporate tax cuts, which have resulted in a revenue loss of Rs 1.5

lakh crore, have contributed to the state's poor status. The timing of these tax cuts was odd, given direct tax receipts fell by nearly 3.5 percent in April-February 2019-20, despite a modest increase in indirect taxes. Because indirect taxes have not compensated for the loss of direct taxes, the budgetary deficit in 2019-20 surpassed 4.5 percent of GDP. One of the reasons for the stagnation of public spending on education and health is because of this.