Economic Notes

Direct and Indirect Taxes

Every year, as the time for presenting the Union Budget approaches, there is lot of talk about what should be done with tax rates. Most of this talk refers to direct taxes – namely, the personal income tax and the corporate income tax. Very little is said about the rates of indirect taxes, which constitute the biggest tax burden on the masses of working people.

Direct taxes consist of the personal income tax and corporate income tax.  Corporate income tax is levied on the profits earned by capitalist companies. Both these direct taxes are levied and collected by the Central Government.

Indirect taxes are levied and collected by both central and state governments. The largest of them is the Goods and Services Tax, or GST for short. Revenue from GST is shared between the central and state governments. Other indirect taxes include the central customs duty on imports, central excise and state value added tax on petroleum products, state excise duty on liquor sales, as well as entertainment tax and electricity duty levied by state governments.

A direct tax is visible to the taxpayer, who knows how much he is paying. An indirect tax gets added to the price of goods and services that people purchase. Most of the time, people are not aware of the amount of money being extracted from them through indirect taxes. The other major difference between the two types of taxes is that the rate of indirect tax is uniform for everyone, irrespective of the level of income. Direct tax rates vary depending on the level of income, with higher rates of taxation applicable to higher incomes.

It is important to note that the direct taxes do not affect the prices of commodities whereas indirect taxes raise the market prices of commodities.

It is often said by various government spokesmen and bourgeois economists that the taxpayer base is low in our country, by which they mean that very few people pay taxes. This is not at all true. All people, rich and poor, pay indirect tax whenever they purchase any good or service. Even the ones who do not have any income pay indirect tax.

Those who claim that taxpayer base is low are referring only to the personal income tax. The reason why many people do not pay income tax is because their income is too low.

The propaganda of low taxpayer base is used to create the impression that those with higher incomes are supporting the poor people in our country, who are allegedly benefiting from government welfare schemes without paying any tax. This propaganda is turning the truth upside down. The reality is that it is the working people, including the poorest among them, who bear the major part of the burden of financing the expenditure of the government.

Workers and peasants pay a much larger share of their income as tax in comparison with the wealthy capitalists, who pay a very tiny share of their income. The lower the income of a family, the more it spends as a proportion of income on consumption of goods and services. Poor working people spend all their earnings on the necessities of life. Indirect taxes are thus a huge burden imposed on the working people.

All the revenues collected by the State are spent in the best interests of the capitalist class. The largest part is spent on maintaining the oppressive bureaucracy and armed forces, and on paying interest to big banks on government loans. Abysmally inadequate amounts are spent on providing the essential services which the State is duty bound to provide, such as education, health care, drinking water and sanitation.

If indirect taxes are eliminated and substituted entirely by direct taxes, it would strengthen the basis for toiling people to demand, as taxpayers, that the state fulfils its duty of providing all essential services in adequate quantity and quality. Workers and peasants must therefore demand immediate reduction of indirect taxes and fight for their complete abolition.

Standard of living of the working people

Government spokesmen keep boasting that the Indian economy is one of the five biggest economies of the world. This is not something to boast about given that the population of our country, at 140 crores, is the largest in the world.

The total size of the economy, as measured by GDP, is not at all an indicator of the standard of living of the people. The per-capita income, which is derived by dividing GDP by the population, is a better indicator. However, even per-capita income hides the enormous inequality between the wealthy capitalists and the masses of working people.

Table 1: Average Per-Capita Monthly Expenditure (Rs)

Household Category Rural Urban
Poorest 5% 1,373 2,001
5% to 10% 1,782 2,607
10% to 20% 2,112 3,157
20% to 30% 2,454 3,762
30% to 40% 2,768 4,348
40% to 50% 3,094 4,963
50% to 60% 3,455 5,662
60% to 70% 3,887 6,524
70% to 80% 4,458 7,673
80% to 90% 5,356 9,582
90% to 95% 6,638 12,399
Richest 5% 10,501 20,824
All Households 3,773 6,459

Source: Table 3.1 on page 22, NSS Report No. 591

A more accurate picture of the standard of living of the working people is shown by the results of the Survey on Household Consumption Expenditure conducted once every few years by the National Sample Survey Organisation (NSSO). The latest such survey collected data during the period August 2022 to July 2023, from a sample of 1,55,014 rural households and 1,06,732 urban households, from all parts of the country.

Table 1 shows that average per-capita monthly expenditure varied from Rs.1,373 for the poorest 5 percent of rural households to Rs.20,824 for the richest 5 percent of urban households.

Per-capita expenditure refers to the average per person. Considering that the average household size is close to 5 in our country, it would be useful to look at how much such a household spends. Table 2 shows the level of monthly spending for various purposes by a 5-member household, on average.

Table 2: Average Monthly Spending by 5-Member Household (Rs)

Purpose Rural Urban
Food items 8,750 12,650
Clothing 990 1,500
Fuel & Light 1,255 2,020
Education 625 1,865
Health 1,350 1,905
Transport 1,425 1,665
Entertainment 1,170 2,120
Durable Goods 1,300 2,315
Rent 150 2,115
All other items 1,850 4,140
Total 18,865 32,295

Source: Derived from Table 3.5 on page 29, NSS Report No. 591

These figures are the average, which itself corresponds to a low standard of living. Moreover, the figures shown in Table 1 indicate that the level of spending was less than average in the case of more than 60 percent of rural households. It was less than average in almost 70 percent of urban households.

In sum, the NSSO survey shows that most working people remain poor in our country. The claims by government spokesmen and various bourgeois economists that the proportion of poor people is now less than 10 percent is not at all true.

Declining Production in Informal Enterprises

The National Sample Survey Organisation (NSSO) has also recently released the results of its Survey of Unincorporated Sector Enterprises, conducted during 2021-22 and again during October 2022 to September 2023. It is a large sample survey of household enterprises and small businesses engaged in manufacturing, trade and transport services, which are not registered and do not submit annual accounts to any authority.

The results of this survey show that the number of such enterprises declined from 6.3 crore in 2015-16 to 5.97 crore in 2021-22. The number of persons working in these enterprises declined from 11.13 crore to 9.79 crore in this period. The gross value added grew from Rs. 11.52 lakh crore to Rs. 13.40 lakh crore, an increase of 16.3 percent during this six-year period. This works out to an average annual growth rate of only 2.5 percent. Adjusting for average increase of about 6 percent per year in commodity prices, the contribution of these informal enterprises declined in real terms during this period.

The decline in the economic contribution of informal enterprises between 2016 and 2022 can be ascribed to the negative impact of the Note Ban of November 2016, the introduction of GST in 2017 and the Covid induced lockdowns in 2020 and 2021. The more recent survey shows that there has been some recovery during 2022-23, with value added rising to 15.42 lakh crore.  However, even this is only 33 percent higher than its level seven years ago. Correcting for the rise in commodity prices, it is lower than the level in 2015-16 in real terms.

The informal sector accounts for about 13 percent of value added in manufacturing, 54 percent in trade, hotels and restaurants, and 40 percent in transport and communication. It accounts for 27 percent of total GDP. The fact that production by these enterprises have declined in real terms since 2015-16 implies that the Central Statistical Organisation needs to revise its GDP growth estimate downwards for this period. It raises serious doubts about the government’s claim that India has been the fastest growing large economy in the world.

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