According to experts, the taxation system in the country is extremely unfair, inefficient and corrupt. Those who are in the tax net are fleeced while many who should be in the net are not there. The state gets money from wherever it can impose taxes, a lot of times on a presumptive and withholding basis, irrespective of the impact that its actions have on the incentives of the players in question. One need not say anything about corruption in the system: anyone who has dealt with tax officials and tax issues will know what is meant here.
Salaried persons pay some 20 per cent of their income as income tax. This is deducted before salary is paid. For most of the goods they buy they pay a 16pc sales tax on them. In addition, there are excise taxes that are charged on a number of goods. And a hefty tax amount is paid when one buys petrol: there is lack of transparency in how much tax the state is charging on every litre of petrol, but it is a significant amount. So, out of every hundred rupees one makes, at least Rs40 go to the state through various forms of taxation.
The other side of the equation is about what people who do pay taxes get in return. Most salaried people in the tax net do not send their children to state schools or state- funded health services, even their water and security are, in many cases, privately paid for. But, for many, even this would be acceptable if their tax money was reaching the poor and deserving. There are large questions about the efficiency of public expenditures as well as expenditure priorities. The quality of education being given in public schools is, by and large, very poor.
The real rub lies in the unfairness of the tax system. Hardly one million or so people file their tax returns. Even among the filers, most of the non- salaried underreport their income significantly. The doctor does not give any receipts for consultations unless one insists on it. Even small operative procedures are off the books. This extends to most professional service providers, businessmen and traders. The state has failed miserably in both extending the tax net and in being able to reduce underreporting of those who do file returns. And it is not simply due to lack of data that the tax authorities have been unable to extend the net or catch underreporting.
The inefficiencies in the tax system are just too many to point out. Service providers and vendors, filers or not, quote their prices net of the withholding tax. It is understandable on part of non- filers but even filers of income tax force us to pay withholding tax on their behalf. These filers are not declaring their full income and so cannot get the withholding tax adjustment. The result is that where we do not have the option of not buying a service from such vendors we end up paying income tax on their behalf. How is that fair? And why are we penalising those who pay taxes to pay for those who are not paying their share? This is just a small example of the kind of distortions we live with.
The overriding need is to lower individual tax rates, widen the tax net, come up with a scheme to repay the refunds owed to taxpayers, reform certain corporate taxes that are adversely affecting capital formation. The way the tax system stands, it is the system of a predatory and extortionist state. Let the new PTI government introduce elements of equity, fairness, progressivity, efficiency, universality and honesty in it.