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Gross tax revenue of government increases despite lockdown: An Analysis

The financial year 2020 and 2021 were marked by an increased tax revenue by the centre, strict lockdowns, empty streets, empty markets, overfull hospitals, isolation, loss of jobs, loss of life, cemeteries full of dead bodies, reduced personal disposable income etc. Loss of jobs and shutting down of markets has induced stagflation in the economy, it is a combination of recession and inflation where the inflation rate is high and economic growth and the employment rate is low.

Surveys conducted by the government reflect doom, despair and negative economic prospects for the coming year. With a high unemployment rate and rising inflation, surveys are bound to enunciate such sentiments.

Solutions to stagflation prescribe reducing dependency on oil which is a dream everyone is struggling for when they invest in alternative fuel technology. Other extraordinary measures include increasing aggregate supply through supply-side strategies, which implies reducing the cost of production, privatisation and loosening grip on regulations. To decrease the cost of production tax rate must be reduced.

However, despite these losses and suggestions gross tax revenue collected by the central government increased over FY 2020. Centre owes this miracle to increased contribution from union excise duties. Due to the closure of the business, the contribution of corporate tax fell sharply, hence the burden of filling the government’s treasury fell on the shoulders of common man. The problem with this shift is the poor timing.

Calvin Coolidge says, collecting more taxes than necessary is a legalised form of robbery. Increasing the tax rate when citizens are suffering is a legalised form of torment.

What is Union Excise Duty?

Union excise duty is a type of indirect tax levied on goods manufactured, sold and licensed in India. This tax is collected when goods are produced or sold. It is also known as CENVAT or Central value-added tax. After the implementation of GST number of indirect taxes have been subsumed including excise duty. Excise duty now is only levied on liquor and petroleum. The manufacturer does not pay central excise duty but it is indirectly passed on the consumer’s shoulder.

While negotiating with states, liquor and petroleum were deliberately kept outside the ambit of GST because these are the two highest tax-generating items. After the introduction of GST, excise duty was renamed as Central GST, since central excise was levied by central government the revenue collected from central GST also goes to the central government treasury. Hence the two highest tax-generating items liquor and petroleum can be taxed to fulfil revenue gaps. Petroleum is an essential item for running an economy, if taxes on petroleum is hiked it has a cumulative effect on each goods produced in the economy.

How does government earn via taxes?

The government earns money by tax and non-tax revenue.

There are two types of taxes direct and indirect taxes. Direct tax is imposed on the income of a taxpayer, wealth like property or estate. The burden of paying direct taxes cannot be passed on to others. There are majorly three main types of direct taxes in India

Income tax – it is imposed on a person who falls under the taxpayer category. Taxpayers with different incomes pay different rates of tax. Taxpayers are directed to file income tax returns every year; failing to do so will result in tax fraud.

Estate tax – estate tax is levied on an estate or on the total value of money and property that a person has left behind after his death. It is also known as inheritance tax.

Wealth tax – is levied on the amount of wealth or property a person possesses.

Indirect taxes imposed by the government on goods and services produced in and outside India (custom duty). The burden of indirect taxes is shifted to the consumer by increasing the maximum retail price of goods. There were several indirect taxes which now all are subsumed under goods and service taxes GST. GST helps in removing the cascading effect of tax on tax anomaly. With the help of input tax credit, a person can reduce the final payable tax amount if they have paid taxes on previous purchases. To avail the input tax credit consumer is supervised to purchase goods with bills.

Why is the oil price skyrocketing?

As discussed before the government has left liquor and petroleum from the ambit of GST, which ensures that any revenue collected on these two products goes straight to the central government’s treasury. Central excise duty is levied on liquor and petroleum. Due to poor economic prospects and reduced disposable income, consumption expenditure is reducing.

Fuel consumption for the financial year 2021 fell more than 10% due to reduced economic activity; the share of corporate taxes reduced from 27.7% to 22.6%. To fill in this gap the government hiked Central excise duty. Collecting tax revenue levied on petroleum is a hassle-free job because the economy cannot function without transportation and for transportation petrol is necessary.

Statical analysis has shown that the NDA government has higher fuel prices than the UPA government, during the coronavirus pandemic global oil prices crashed but prices of petrol in India did not.The opposition has alleged that the NDA government uses petrol as the cash cow, the central excise duty on petrol has risen from 9.48 per litre in the UPA government to 32.90 per litre in the NDA government.Petrol prices in Rajasthan’s Shree Ganganagar and Madhya Pradesh’s Indore are crossing ₹100 per litre mark.      

What did the recent survey by RBI indicate?

RBI recently conducted a consumer confidence index survey which is a pointer for economic growth and household spending on consumption. Whenever a consumer is optimistic about the future his spending increases. Personal consumption accounts for 60% of the Indian GDP hence CCI is an important indicator.

It was conducted in 13 major city‘s like Bhopal, Ahmedabad, Mumbai, Patna et cetera where consumers were questioned about general economic prospects, personal income, expenditure, employment et cetera. CCI in all its indicators FEI and CSI indicated negative responses about economic situation and employment. Consumers also responded that economic situation has worsened. The index which deals with employment rate has been going downhill since Narendra Modi became prime minister in 2014. Future expectations on employment are not reasonable because of the pandemic induced stagnation.

The indicator dealing with expectations on income has seen a steep decline of -50%. If a consumer has disposable income he will increase the consumption expenditure which will result in income generation. The survey collected data on expenditure on luxury and non-essential items, the data shows decline in non-essential spending after 2018. The pandemic has further reduced this expenditure.

Way ahead

If we are ever to come out of recession inflation Few steps need to be taken which are–

The government has to let go of the need to collect tax revenue by shifting burden on other sectors to make up for the lost tax in times like pandemic. Due to pandemic closure of economic activities will result in lower-income, which should ideally reflect in tax revenue collected by the government, because ultimately tax revenue is accumulation of common man’s income.

The government has to be reasonable and bring down union excise duty so that fuel prices are reduced. An increase in oil prices implies a higher transportation cost which leads to price hike in every sector.The government also needs to cut down the cost of production so that aggregate supply can increase in the economy.As suggested by many MNCs and other big companies, printing more currency is the way out of stagflation.

 

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Aishwarya Ingle

I am a person who believes in freedom of human mind. A free mind is highly creative and imaginative. Imagination is not a cloth that is to neatly folded in a box, but it is fire. It can light an entire jungle or a single matchstick, it depends upon the free environment.

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