Time for counter-inflationary direct taxes
TAX collection has been one of the lowest in the region because of a poor tax culture. The country's tax revenue stood at just over nine per cent of the GDP in fiscal year 2009-10 compared to 12.9 for India and 14.2 per cent for Sri Lanka.
As a result of lower tax collection, the government spending on education and health stood at around two and 0.5 per cent of the GDP respectively one of the lowest in the region and the world.
Besides, the country has to depend heavily on internal and external debts and it falls back on IMF support, whenever there is an internal or external shock to the economy.
If there is a political will to boost tax revenue in order to bring down government's budget deficit, contain inflation and make the economy selfreliant, it may not be difficult to tap potential sources that are still either untaxed or under-taxed.
While agriculture has a share of nearly 22 per cent in the GDP, its contribution to tax revenue is only one per cent. Similarly, the services sector contributes 26 per cent of the total tax revenue, while it accounts for the highest share of 54 per cent in the GDP. The manufacturing is the only sector that pays taxes much more than its share in the GDP.
Similarly, government depends heavily on indirect taxes such as GST, customs duty and excise duty, which are universally regarded as regressive, since these taxes are ultimately passed on to consumers, majority of whom are poor. The indirect taxes still account for 68 per cent of the government's total tax revenue. The share of direct taxes considered as progressive since they are paid by the rich and well-to-do is still considerably lower than its potential.
Besides, withholding taxes have been mixed up with direct taxes, although they do not qualify as direct taxes. To quote Economic Survey, 2009-10, 'despite the impressive increase, however, the actual income tax base is low since direct tax collection has been boosted since the 1990s by the introduction of the withholding tax (WT) regime'.
Then the income tax is mostly being collected at source from the salaried people, employed in government departments, public sector enterprises and the private sector. Other than the aforesaid salaried taxpayers and those paying withholding tax, the number of people paying direct taxes constitutes a small percentage of potential income tax payers.
Farm incomes have so far remained exempted from tax payment. Similarly, the self-employed in the services sector, real estate earnings, businesses in the informal economy and those enjoying tax exemptions, are not paying any income tax.
The non-payment of taxes by a significant percentage of potential taxpayers is depriving government of much-needed share of revenue potential. The untaxed billions are also creating the problem of conspicuous consumption, ostentation and wasteful expenditure that is constantly pushing up the rate of inflation.
A certain percentage of the taxevaded income is finding its way into the commodity markets by way of speculative investment, aggravating inflation. The untaxed income bonanza has also been creating demand in excess of the locally available supply thereby reducing exportable surplus, raising import bill and widening the gap between the imports and exports.
In order to contain inflation, and bring down the trade and current account deficits to a sustainable level, it has become imperative for the government to bring all such untaxed income into the tax net.
There is a misconception among some people that all taxes are inflationary. No doubt, indirect taxes such as GST, customs duty and excise duty are of an inflationary nature since they are passed on to consumer by raising the price of the commodity on which the tax has been levied.
Similarly, increase in the price of oil, electricity and gas has to be borne by the consumer directly and, at the same time, it raises the production costs/prices of locally produced commodities that he consumes.
However, tax levied on big incomes is not inflationary, since the incidence and the impact of the tax are on the same person and it can not be passed on.
On the contrary, such direct taxes have been called 'counter-inflationary', since they reduce the capability of the tax-payer to squander his money or use it for speculative investment.
Direct taxes collected from the rich on their incomes play a significant role in checking conspicuous consumption. They are an important source of government revenue the world over and help increase spending on education, healthcare and human resource development. Over the last few years, taxto-GDP ratio has gone down to around nine per cent, while the government expenditure is on the increase.
As a result, the budget deficit has risen to over six per cent; public debt has moved up to 63 per cent of the GDP and government dependence on the IMF and other donors has increased alarmingly.