Regressive taxes or progressive taxes: Which works better for India?
A good dictionary defines the word progressive as ‘happening or developing gradually or in stages’, and the word regressive as ‘taking a proportionally greater amount from those on lower incomes’.
Progressive taxes vs Regressive taxes
From the taxation perspective, progressive taxation structure implies, taking a greater proportion of income as taxes, from the rich, while decreasing the same proportion for the less well-off. On the other hand, in regressive taxation, the tax rate may be the same but this proportion of income collected as taxes reverses.
Taxes can be clubbed in two baskets: one is a direct tax and the other is an indirect tax. Direct taxes are the type of taxes which are paid by the person directly, from the person's income to the government. Alternatively, the burden of an indirect tax is on the ultimate consumer, who, in most cases gives the tax to the vendor and on the consumer's behalf, this tax will be paid by the vendor to the government. For example, when you purchase a cake and pay GST to the confectionary vendor, the burden of the tax falls on you but the vendor indirectly deposits the same to the government.
So, the question that comes to the fore - should taxes follow the progressive route or regressive route?
Decoding the Indian tax structure
In India, Direct Taxes are levied in the form of Income Tax and Corporation Tax among others. Income Tax for individuals is charged in slabs as per which the tax rate increases from 5% to 30% for the current year 2018-19. So an individual with Rs 9.5 lakh per annum of taxable income, he or she is required to deposit 20% of his majority income but the same individual will give 30% on his or her majority income if the taxable income touches Rs 16 lakh per annum.
The difference has been maintained as per 3 threshold limits of Rs 2.5 lakh per annum, Rs 5 lakh per annum and Rs 10 lakh per annum with an intent to share a proportion of income as taxes for the overall development of the economy and the different slabs fulfills the objective of giving the benefit of enjoying more proportion of income as disposable income to the less privileged individuals (so that their basic necessities are fulfilled).
So by now, all of us know that income tax in India is progressive in nature. But the question that needs to be answered ‘Is it serving the purpose with which the slabs were designed?’ The answer is a straight NO.
Steps that will make Indian tax structure ‘truly’ progressive
It has been observed that wealthy Indian citizens try to manipulate their incomes so as to have less burden on their incomes towards serving the society. They think that they are working hard so the benefit must be reaped only by them. They are true in their own sense but they must realize that they are excelling only through resources which are given to them by the society. Society makes its scarce resources available only to the most efficient people. For example, the manufacturer who can produce a good quality product with a relatively attractive price will be valued more and it will get reflected in his captured market share. He is earning through society because that very society has given him access to the people from whom he is maximizing his wealth.
Also, mostly, the students from good government-run universities draw high remuneration or excel in their entrepreneurship skills. They have used the government resources by availing the services of the institutes funded partly through the collection of taxes. So they must fulfill their responsibility as a citizen of the nation by reciprocating in the form of faithful contribution to the society.
Going further, agricultural income in India is tax exempt with a preconceived notion of treating it as a less thriving sector. But, a lot of agriculturalists have accumulated huge resources made available to them by the society. Instead of exempting the entire agricultural income, the tax authorities may provide a deduction to them on account of research and development done in the sector to strengthen our economic backbone and have an improved ripple effect in the economy.
The idea is to motivate the citizens to keep the intent of keeping the income tax structure progressive for the overall progress of the Indian economy.