Attack on the idea of India: A Decade of Social, Political and Economic Strife: What happens when tax incentives for corporate entities keep rising, like the corporate tax cut of September 2019 (FY20) amidst a fiscal crisis, the PLIs and DLIs and a host of other incentives to manufacture and export goods? The peak base rate for corporate entities has fallen from 30% to 22% (without exemptions) for existing manufacturing units and the minimum alternate tax from 25% to 15% for new manufacturing units. “Effective tax rate” (minus all tax incentives) – not available for FY22 and FY23 – for corporates making profit before tax (PBT) of over Rs 500 crore is 19%. It ranges from 22.5% to 24.8% for the rest – lower for corporates with more PBT and higher for those with less PBT (maximum of 24.8% for those registering PBT of Rs 0-1 crore).
In contrast, the peak tax rate for individuals remains 30% (taxable slab of Rs 15 lakh and above without exemptions) – 5 percentage points higher than for corporate entities. It must also be noted that corporate entities are taxed on their “profits”, that is, after deduction of expenses while individuals pay tax on their “incomes” without deduction of expenses.
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India’s oil tax burden
The oil taxes went up incessantly during 2015-2021 even as international crude price crashed and remained low during 2015-2021. This was in spite of the fact that oil prices were “fully” decontrolled by the current regime in 2014, as against “partial” one in the previous UPA regime. During 2015-21, the Brent price was about half of what it was in earlier years – from annual average of over $100/barrel in FY12, FY13 and FY14 to $58.5 during FY15-FY21. During this period, the Central government raised several indirect taxes on fuel – Excise, Customs, IGST, CGST, Service Tax, Cess, Royalty, Surcharge, Dividend etc.
In 2022, the Brent prices went up following the Russia-Ukraine war; the rise in taxes stopped for petrol and diesel but LPG (cylinders) and CNG (compressed gas to households) continued to rise. This happened when India was importing a bulk of its oil cheaply from Russia – at $60 per barrel when the crude was over $110. Who gained? The three top gainers were three private companies – Reliance Industries and Nayara Energy and an unknown Mumbai-based company Gatik Ship Management. Indian emerged as top exporter of oil to Europe. Oil PSUs gained too but not ordinary Indians.
Between FY15 and FY23, the Central government moped up Rs 31.6 lakh crore and states Rs 19.9 lakh crore – taking the total to Rs 51.4 lakh crore – from the higher oil tax and dividend. Oil tax alone has gone up by 241% from FY15 to FY23. This is way too high than what the UPA had collected when the crude price was soaring before 2014-15 – at annual average of Rs 3.4 lakh crore, it is more than double that of Rs 1.4 lakh crore during FY12-FY14.
In defending high oil tax, Finance Minister Sitharaman misled the country first in August 2021 by blaming states for the raising retail prices of petrol and petroleum products and then calling it a “trickery” of the previous Congress-led UPA government for burdening the Centre with “oil bonds” – which actually insulated people from rising crude and kept the retail prices low. Thereafter, she blamed it on the Russian-Ukraine war.
Were the states to be blamed? No. States lost indirect tax rights when they accepted the GST in 2017 and compared to the Central government, states collected Rs 19.9 lakh crore, against the Central government’s Rs 31.6 lakh crore during FY15-FY23. Did the previous UPA government put the “oil bond” burden? Yes but no because the new government paid very little outstanding “oil bond”. Budget documents show, the outstanding oil bonds in FY14 was Rs 1.34 lakh crore – a year before the new government came. By FY22, the outstanding was Rs 1.21 lakh crore – which meant it had paid only Rs 13,500 crore or 0.5%, while collecting Rs 27.3 lakh crore in oil taxes during FY15-FY22!
High oil tax is a direct burden on the poor. Here is how.
A government sponsored survey of 2014 showed: (a) 61.4% of petrol is consumed by two-wheelers (b) 13% diesel is consumed by agriculture and (c) 70% of diesel, 99.6 % of petrol are consumed by transport sector. The first one shows high tax on fuel is a direct burden on the poor who use two-wheelers and the other two raises the cost of travel (by bus and train), food and other essentials. High fuel tax, when crude price has fallen but not passed on to consumers (as continued to happen even as international crude prices fell in 2023 and the cheap Russian oil brought windfall gains to oil marketing companies), not only feeds inflation, it cuts down households’ disposable income.
High GST collections
Ordinary people are burdened by high GST too – as an indirect tax, the impact on the rich and the poor is equal but the ability to pay is not. The government takes particular pride in high GST collection – a rise of 116% between FY18 and FY24 (BE) – and yet in July 2022, the government imposed 5% GST on food items consumed by the poor and exempted earlier – on pre-packaged unbranded food items like wheat, rice, curd, lassi, puffed rice, mutton and fish in. This was when the GST on luxury items had been cut down from 28% to 12-18%. Sitharaman said it was approved by all states but Keral refuted and said it wanted the GST on luxury items to be restored back to 28%.
If other states agreed to tax on these food items it was only because having sacrificed most of their indirect tax rights while adopting the GST (eight central and nine state indirect taxes were subsumed into in 2017) and the GST Compensation discontinued from the same July 2022 they were left with little choice. A higher GST collection would mean they would get more (their share) – as against a loss of 34% from the discontinuation of the GST Compensation.
High GST is both bad taxation and bad economics – it violates the cardinal principles of capacity to pay and equity. Advanced economies collect more direct tax and less indirect tax for these reasons. India does the reverse – giving tax cuts and incentives to rich individuals and corporate entities (more profit they make less “effective tax” they pay). Six years down the line, the GST and its IT infrastructure remain a work-in-progress, riddled with systemic loopholes because of which fake GST claims keep mounting every year – reflecting a broken system.
The poor is also targeted by banks (SCBs) – which have written off Rs 14.6 lakh crore of corporate loans by branding those as NPAs without battling an eyelid during FY15-FY23. Banks have collected huge amounts as penalty for not maintaining minimum balance and additional ATM withdrawal charges and SMS service charges. They collected Rs 35,587.68 crore during FY18-FY23 on these accounts, as the government told the Rajya Sabha in August 2023.
An earlier reply to the Lok Sabha had revealed that banks had collected Rs 10,391.4 crore during FY16-FY19 (up to September 2018). This is remarkable since the government has shown extraordinary sensitivity to the rich: (i) abolished wealth tax in 2015 (b) reduced maximum surcharge on high net-worth individuals (HNIs) from 37% to 25% in the 2023 budget (c) put on hold a 20% levy on payment of over Rs 7 lakh through international debit and credit cards and (d) lowered GST on luxury goods in 2022.
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But how does one know that the tax burden has actually shifted to the poor? It shows up in various other indicators: (a) Tax data (b) household savings (c) poverty and hunger and (d) unemployment numbers etc.
(a) 54% fall in taxable income in 7 Years
The best tax data is not the total number of returns (ITRs) filed but the number of ITRs declaring taxable income (total ITRs filed minus ITRs showing zero tax liability). The IT department’s annual data shows the number of ITRs declaring taxable income was 48.6 million (3.8% of population) in FY16 (pre-demonetization) and 48.9 million (3.8% of population) in FY17 (demonetization fiscal) (demonetization fiscal). Their number fell to 22.4 million (1.6% of population) in FY23 as the Lok Sabha answer of July 24, 2023 showed.
This is massive fall in taxable income ITRs – by more than half (53.9%) from FY16 and FY17. It couldn’t have happened by a rise in taxable limit of Rs 2 lakh (other tax incentives remain virtually unchanged) from the pre-2014 period alone. As the above data shows, the impact of the twin shocks of demonetization of 2016 and GST of 2017, the pandemic economic shutdowns in 2020 and 2021 and the subsequent K-shaped pandemic recovery is obvious.
The ITR data including zero tax liability filers (total ITRs) giving income group-wise data provides how the different income groups have been impacted. These data provide six income groups: up to Rs 5 lakh, Rs 5-10 lakh, Rs 10-20 lakh, Rs 20-50 lakh, Rs 50 lakh-1 crore and above Rs 1 crore. (For convenience, Rs 5-10 lakh is taken while it is Rs 500,001 to Rs 10 lakh, and so on). This data for six fiscals of FY18-FY23 shows:
• Those in the lowest income category (up to Rs 5 lakh) have suffered badly – their numbers falling from 52.55 million in FY18 to 49.78 million in FY23. The average growth in their numbers (five fiscals) is -0.4%. They matter most as they constitute (average) 80% of total ITRs (76.6% in FY23) – and a sign of mass impoverishment.
• The average growth (five fiscals) for all other income categories is positive – 5.4% for Rs 5-10 lakh and 10.3% to 13.5% for the rest (higher income) categories.
• As percentage of the population, the ITRs are stagnant – 5% in FY18, 4.9% each in FY19 and FY20, 5.3% in FY21, 4.6% in FY22 and 5% in FY23. Thus, the taxbase (ITR) has remained stagnant…
(b) Household financial health: Back to 1970s
On September 18, 2023, the RBI released the latest data on financial health of households. It shows, net financial assets of households dropped sharply from 11.5% of the GDP in FY21 to 7.2% in FY22 and 5.1% in FY23. Going by its data, available since 1970-71, this fall (5.1% in FY23) is a 47-year low! The last time it went below 5.1% was in 1975-76 when it was 4.7%; the next low was 5.2% in 1977-78.
This is a huge fall. In 16 out of 18 fiscals between 1993-94 and 2010-11, net financial assets averaged 10.8%, peaking at 12% in FY10. After FY11, the only fiscal it touched double-digit was in FY21 (11.5%) – the pandemic fiscal in which the GDP growth plunged to -5.8% – and then dropped to 5.1% in FY23 when the GDP growth was 7.2%.
The fall in net financial assets is due to a sharp rise in financial liabilities. The latest RBI data shows, liabilities fell from 3.9% of the GDP in FY21 to 3.8% in FY22 but went up to 5.8% in FY23. In the past 53 fiscals for which the RBI provides data (since 1970-71) only twice financial liabilities crossed 5% – 5.1% in FY06 and 6.6% in FY07. The growing impoverishment of households has been known for years and yet, no attention has been paid. Here are five more official datasets to demonstrate this.
(i) The NSSO’s 2017-18 household consumption expenditure survey (MPCE) showed a fall in ‘real’ expenditure – but it was junked on misleading claims (that an experts committee questioned the data quality38). No MPCE survey has been taken up thereafter.
(ii) The MoSPI data shows, net household savings (financial and physical assets) has fallen from 23.6% of the GDP in FY12 (25% in FY09 and FY10) to 19.7% in FY22 (up to which data is available). Household savings constitute 64% of gross domestic savings (gross capital formation), during FY12-FY22.
(iii) Net physical assets have fallen from 16.3% to 12% of the GDP during the same period.
(iv) The RBI data shows bank credit outflow inverted in FY20 – “personal loans” for consumption overtaking that to industry, large industry and services and continues to do so in FY24.
(Excerpted with permission from ‘Attack on the ‘Idea of India’: A Decade of Social, Political and Economic Strife’, Prasanna Mohanty, Black Eagle Books; https://www.amazon.in/Attack-Idea-India-Political-Economic/dp/1645604926)