Inflation, Direct and indirect taxes: Indian citizen’s dilemma By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

June 10, 2016 | Posted by bobbysrinivasan << back to blog

Taxes. Taxes, it is hidden in every transaction that we do on a daily basis, be it buying groceries and filling a tank. Take for example going for a much deserved buffet lunch to a restaurant whose price can be categorized as belonging to an upper range. I thought I deserved this sumptuous lunch but to get to the restaurant I needed to drive 20 Km up and down inclusive from my residence in the GLIM campus to Mahabalipuram. The price of diesel is currently around 60 Rupees per litre. In this pricing the government will receive approximately 28 to 30 Rupees as taxes and excise duties. This includes the latest hike of 1.50 Rs. for excise duty. Checking the menu I found a buffet costed 1000 Rs. At the end of the meal I noticed that the Value Added Tax plus Service Tax (including swachh bharat cess) amounted to Rs.195.50. In order to spend this Rs.1000 I realized that I needed to earn 1333.33 Rupees. The government of course will be earning 333.33 Rupees as direct taxes deducted from my salary. When I added all these costs I noticed that this is what the government earned from my lunch.

Direct tax	333.33	(Deducted at source)
Indirect tax	195.50
Fuel indirect tax	30.00
	558.80

The lesson from this experience is sobering. When I sat and analysed, I learnt how little I am getting for my money. At this point I was reminded of the upcoming GST and it was not clear as to how much the rate will be. Given that the government needs all the money in the world to keep their deficit under control, I concluded that the future does not augur well for restaurant eating. Why? We have high food inflation and this will be reflected as higher cost for the buffet and hence the taxes.

Assuming an average tax rate of say 25% and an indirect tax of say 20% our capability to purchase goods and services is approximately 55% of our salary. If by any chance we save enough to earn more than 10000 Rs as interest the government would take it away at 33.33% of it as taxes. There will be a point in time everything will become a luxury, for the so called middle class.

It is sad that an economy of this size only 2.5 to 3 crore people file income tax. It is not that the people don’t have income but they don’t need to pay taxes because their income is derived from agriculture or they presumably engage in cash transaction without the money coming into taxation purview (often referred to as black money). If the government wants to be fair and uniform and plan to treat all citizens equally than they should abolish all taxes except the service tax and the tax rate could reflect the treasury needs. This was what our old kings did it namely one sixth of all income was given the government as tax (manyam). This way the government will know how much money is in circulation and its velocity. In Countries like Sweden, Denmark where the total taxes paid were very high, atleast the social security system takes care of people from cradle to grave. Indians need savings for all their needs be it marrying of a daughter or sending a child to college or to pay for the medical expenses for the elders.

In summary an average Indians propensity to save is affected by the direct and indirect taxes and the inflation rate. Unfortunately habits die hard and so his effort to save becomes harder and harder. This is already reflected by the gross domestic savings rate which has dropped significantly in the recent years. Achieving an economic growth depends very heavily on domestic savings.

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