Is India ready to become tax focused economy?
The answer is Yes and No.
Earning revenue from domestic market and also in the form of foreign currency reserves is must, for any union government and corresponding state governments/provinces etc…, to provide governance and administration in the country.
What are the primary sources of revenue of central & state governments across the world?
Based on availability of natural resources & rare metals, tourist locations & landscapes, innovation & developed industries, built infrastructure etc… different countries adopt and prioritize different combinations of revenue sources as briefly summarized below,
- Crude oil for Saudi Arabia, Russia, Canada, Iraq, United Arab Emirates, United States, Norway, Kuwait, Nigeria, Brazil, Libya, Angola, Oman, Mexico, Kazakhstan etc…
- Wine for Italy, Spain, France, USA, Australia, Chile, Argentina, South Africa, Germany, Portugal etc…
- Alcoholic beverages for France, United Kingdom, Italy, United States, Germany, Spain, Mexico, Netherlands, Singapore, Belgium, Chile, Australia, Portugal etc…
- Tourism for Aruba, British Virgin Islands, US Virgin Islands, Maldives, Seychelles, Bahamas, St. Lucia, Cape Verde, Malta, Antigua & Barbuda, Macau, India etc…
- Rare earth metals for China, United States, Myanmar, Australia, Thailand, Madagascar, India, Russia etc…
- Precious metals for Australia, South Africa, Russia, Bulgaria, Kazakhstan, Peru, Canada, Bolivia, Mexico, Ecuador, Argentina, Turkey, Finland, Spain, Netherlands, Mongolia, Kyrgyzstan, Sweden, Israel etc…
- Agriculture for China, India, USA, Indonesia, Thailand, Ukraine, Netherlands, Germany, France, Brazil etc…
- Software & IT services for USA, China, India etc…
- Electronics, computers & other hardware for China, South Korea, Taiwan, Singapore, Netherlands, Japan etc…
- Defense hardware for USA, Russia, France, Germany, Israel, Spain, South Korea, Italy, China, Netherlands, UK, India etc…
- Tax collection as a revenue source for almost every country in 21st century.
Can tax collection be the sole source of revenue for governments across the world?
While governments across the world, uses their unique sources of revenue based on local advantage, taxation is something that is being embraced over thousands of years and that approach stays relevant even today. It was clear and is evident that, people revolted when governments behave in imperialistic way, making it difficult for people to make ends meet, and on other hand, when governments prove to use taxes (direct and/or indirect taxes) in transparent way, for the development of country and growth of people, those governments continued to earn the trust of their citizens/residents.
A quick brief on nature of tax systems,
- Regressive tax systems: As per this approach, tax rates go down with increase of income of an individual and vice versa, causing burden on economically weaker sections on the society, irrespective of their profession.
- Progressive tax systems: As per this approach, tax rates increase with increase of income of an individual and vice versa, causing a feeling in middle class and above that, their extra efforts to earn more are of lesser use to their family, since the situation turned out to be penalizing the one who earns more.
- Proportional tax systems: As per this approach, tax rates will be considered equally on everyone, as this happens based on a percentage, on the individual’s income.
On a quick note, many countries use different kinds of tax systems in different situations. They are,
- Direct taxation: This is tax collection on income.
- In-direct taxation: This is tax collection on expenditure.
Citizens belonging to countries (that generally deploy progressive tax systems), choose alternatives with either low tax rates or no tax rates (tax havens, that charge a fee to hold the funds like an asset) to avoid paying a major stake of their income, as tax in their home country. The reasons are simple and one of the important ones are that, they dislike being taken for granted when it comes to extracting the maximum amount of tax from them, unless and otherwise governments clearly communicate their intent in terms of time span of progressive tax system deployment and the purpose for which the majority value of the collected tax will be spent for, citizens/residents of such countries may do everything possible, to divert their income to uncharted locations.
There are countries that has strong foundation in terms of sources of income, other than tax collection, avoided both direct & in-direct taxes till recent time, some of them include UAE, Saudi Arabia, who also started to collect Sales tax (VAT), an in-direct tax, in recent years, while majority of the democracies around the world, collect a combination of taxes in the scope of income tax, service tax/GST, property tax, transaction tax etc… India is no exception.
To quote Chola dynasty as an example, they used to collect tax on trades and on land sales predominantly.
In modern India, there are income tax, GST and property tax, all collected by and for use in different government scopes.
Which tax system is better?
Regressive tax systems are to never be encouraged. The simple reason is that, it tries to extract from the economically broken individuals.
Progressive tax systems are to be used sparingly and for a limited time, for maximizing results. Example scenarios include,
- collecting taxes from the rich, to be of use, when creating basic infrastructure etc in a newly formed nation
- when the nation is at war, it needs lot of funds, progressive tax systems help generate funds, that can be used to purchase weapons quickly from friendly nations, to effectively defend itself from invasions
Proportional tax systems are to be used when the economy starts to be stable and country seems to run with normalcy, making every citizen/resident part of the growth story of their country.
What are some of the ways people spend/invest to reduce tax payments?
While personal riches & luxury are among the higher priorities for many, people tend to
- invest in startups, stocks, government bonds etc…
- invest in gold
- minimally in fixed deposits due to lesser interest rates from banks & post offices, while more are doing into endowment plans with life insurance companies
- few individuals in forex trading, while like a craze, many are gambling by investing in cryptocurrencies and some governments support that while some others are against that and many governments are with neutral stand.
- donate to NGOs doing good work in developing countries, in support of providing basic facilities like digging wells, running schools & hospitals etc…
- donate to missionary organizations to proselytize in other countries
- provide aid to countries, through their governments for different purposes etc…
Note: Union Government allowed this thought process as this will create consistent usage of different systems like life insurance, health insurance, government bonds, stock brokerages, home loans, donations to income tax department approved NGOs, spiritual organizations, PM & CM relief funds etc…
How does common man see taxation in many countries, especially India?
Unless you have a reasonable cause to spend, you will be made to pay tax on your income.
Is this perception true or false?
Isn’t it the responsibility of citizens/residents in any country, to pay tax, so government is empowered to do what it is intended for? GOVERNANCE?
While the idea was to pen down as a book but, it ended up as an article, few years ago,
https://www.idealnation.net/2019/04/14/tax-paying-is-every-citizen-resident-right-isnt-it/
What is required for India now?
While British charged 3X tax explicitly on indian farmers, empowered zamindari system and laws in courts to snatch away farm lands for missing timely payments etc… in pre-independence era (i.e., before 1947), what change happened thereafter?
Income Tax, a kind of progressive tax system and is considered to be a direct tax, was chosen as an income source to the government in initial times. This was later complimented by service tax and alikes, that all were clubbed to become GST, a kind of proportional tax system and is considered to be an in-direct tax, that was collected through merchants.
What common man in India needs now is a tax reform, that will instill confidence in such a way that, all collected tax, irrespective of whether it is done by the Union government or by state governments or by local governments, they are spent primarily on development and partly on welfare, but “not on FREE schemes”, for short-term political gains. A tax payer is a nation builder.
While GST helped reduce no. of in-direct taxes, it is time for India/Bharatavarsha, to reiterate “One Nation, One Tax” in action, with exception of customs duty.
India to introduce transaction tax, a real-time taxation system, that is considered to be a proportional tax system and that has traits of both direct & in-direct taxes, in a strictly non-cascading way.
This requires a simplified rule book and a digital framework that will transparently make tax collection happen, while fulfilling the fiscal budget needs of the government on one side and when being friendly on common man’s pocket.
Non-Cascading Transaction Tax proposal from IdealNation is one such tax reform proposal, that was designed to address the above cause.
https://www.idealnation.net/2019/04/08/non-cascading-transaction-tax/
A data backed article was published earlier, showing the application of Non-Cascading Transaction tax, that link is provided below,
Summary:
With world expecting a lot from India, in terms of business growth and to maintain stability in India-Pacific region, that will serve as a workable model to the rest of the world, India/Bharatavarsha to expedite implementation of reforms and one of the most of the important ones are tax reforms. Non-Cascading Transaction Tax proposal is the need of the hour and if implemented comprehensively, that has potential to equip the country to address future challenges of the world, leave alone occupying higher positions as per GDP ratings, the expectations are in the lines of contributing >24% of world’s yearly GDP by India/Bharatavarsha in coming years, while Indians lead the way to compete with Bhutan in terms of Gross National Happiness index in near future.
India/Bharatavarsha to contribute above 24% of world’s GDP in a year soon, while having a healthy competition to go to the top as per Gross National Happiness index in near future.
What are we waiting for? It is time to understand the need for comprehensive structural reforms in taxation and consider discussing and adopting Non-Cascading Transaction Tax proposal from IdealNation, with open minds.
https://www.idealnation.net/2019/04/08/non-cascading-transaction-tax/
It’s time, let’s Do it!!!
P.S. UPDATE (10-10-2022): The article was elaborated in perspective and detail, after receiving feedback from Chartered Accountant friends like Mr.Mohammed Hassan.
