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  • Jul 23, 2020
  • Covid-19 may further skew India’s tax profile

    With Covid-19 infections crossing a million last week, and the virus spreading to new regions, India’s pandemic challenge is bound to become more difficult. Unless daily cases start coming down, business and consumer sentiment is unlikely to recover. This has also raised some doubts about government finances, especially revenue collections. A look at the available numbers suggests that indirect taxes might end up accounting for an even larger proportion of total taxes this year than they typically do.

    This is more than just an economic curiosity and has an important political economy implication for India, where governments have traditionally guarded against being seen as levying taxes on the poor.

    Direct taxes are progressive in nature – the rich pay at a higher rate than the poor – and a fall in share of direct taxes in total revenue entails retrogression in the tax burden. A person earning Rs 10 lakh per year faces a lower income tax rate than someone who earns Rs 1 crore per year. Indirect taxes do not make this distinction. Petrol is sold at the same rate whether it is meant for a motorcycle or an expensive car.

    India’s political economy landscape has two basic contradictions. Agriculture produces less than 15% of the GDP, but employs more than 40% of workers. And just a little over fifty million of India’s 400 million workers pay income taxes.

    These two numbers are often used to caution against any radical redistribution in favour of the ‘have-nots’, at the cost of the ‘haves’ in the economy.