It is a myth that the poor don’t pay taxes as they pay a significant amount through indirect taxes
What are some popular misconceptions about fiscal policy in India?
Poor don’t pay taxes - The poor pays all kinds of indirect taxes like GST, excise tax, sales tax when they buy a product.
However the taxable middle-class feels that the poor enjoys all the subsidies without getting taxed.
In reality the indirect taxes gets inflated by all kinds of indirect taxes imposed by both central and state governments on petroleum products.
Today indirect taxes are becoming more important relative to direct taxes.
All rich pay taxes - All rich people do not necessarily pay income tax.
Only salaried people with TDS have no way to evade income taxes.
Rich farmers in India need not pay agricultural income tax.
Even a salaried individual, under current income tax regime, can earn around ₹7.5-8 lakh a year without paying any income taxes by making use of various exemptions.
As a result the Indian tax system is becoming less progressive over time.
Real income of income tax payers got increased - In the last budget tax rates and exemption limits for different income tax brackets are not changed.
This affects the income tax payers adversely in an inflationary situation.
When the prices go up by 10% everyone’s income also increases by 10%.
People moving to higher income tax brackets have to pay a higher percentage of tax. It means their real income remains the same.
Government should stimulate demand through tax concessions - The government can spend more money on infrastructure development instead of giving tax benefits or putting more money directly in the hands of the people.
Spending on infrastructure projects will creates demand through productive job creation instead of subsidies.
As a result money gets transferred to the poor by taxing the rich.
This would increase net aggregate demand as the poor have a higher propensity to consume.
On the other hand, better physical infrastructure is expected to attract more private investment which would in turn expand the productive capacity of the nation in future.
The long-term trend growth rate of an economy depends on the growth of production capacity rather than the growth in aggregate demand.
So additional government expenditure has bigger effect on aggregate demand than equal reduction in tax revenue.
With the same level of budget deficit, it makes sense to rely on additional government spending rather than tax cuts to created demand.
Present tax concessions benefit the needful – Consider health insurance which has GST at a high flat rate of 18%.
A low-income senior citizen does not have to pay any income tax.
Still he has to pay the 18% GST on health insurance premium without getting any tax deduction.
Under Section 80D, he can only deduct the premium payment including the GST up to Rs 50,000.
But a rich person with marginal income tax rate of 30 per cent plus surcharge would enjoy a significant tax benefit.
Disinvestment proceeds targets are not met - Many express dismay over the huge shortfall in achieving the target of disinvestment proceeds.
There is a distinction between strategic sale (that changes management and control, as in the case of Air India) and mere equity dilution (by selling some PSU shares).
If strategic sales are not possible (because no strategic investor is forthcoming), it is better to wait rather than hastily sell at existing prices to present a better fiscal deficit number.
The focus should be on efficiency improvement through disinvestment rather than raising money for the government.
