Sāmatvārtha - Tryst with Taxation, Welfare, and Urbanism

In this essay, we explore a strategic approach to transforming India into a Solarpunk Indic-Futurism by rethinking economic policies, focusing on simplifying taxation, enhancing urbanism, and optimizing welfare systems to create a more inclusive, sustainable, and regenerative future.

A Policy Panacea Prescription for India 1-2-3 to leapfrog into a Solarpunk Indic-Futurism

In earlier essays of this series on Sāmatvārtha, we began our journey at rethinking economic policy making from first principles, so as to envision a more open, prosperous, interoperable, sovereign, federated, modular, inclusive, sustainable, and regenerative future for India. Thereafter, we set the foundations for the mindset that will shape the policies to build for the many Indias within India. We also opened the pandora’s box that is Money. We will now dive deep into the specific pillars of taxation, urbanism & welfare which can bring us a bright solarpunk circular economy future.

Taxation in India

Everyone’s got an opinion on taxation. Is there any subject more universally reviled and simultaneously inescapable? Taxes seem to have become a catch-all policy tool for doing everything! For the uninitiated, we broadly categorise taxes as either Direct or Indirect. This categorization is based on tax incidence, i.e. the ability to pass down the cost of tax liability. While Goods and services taxes (GST) now cover most of the indirect taxation in India, direct taxation has two main headers under it - Income Tax and Corporate Tax.

(Personal) Income Tax – This is a tax on different incomes received by an individual, a Hindu Undivided Family or any taxpayer other than companies.
Corporate (Income) Tax – This is the tax that companies pay on the profits they make from their businesses.

For most of the last two decades, India has consistently observed a tax-to-GDP ratio of around 10-11 %. What even is the purpose of having different types of taxes? Are we offloading too many goals onto a single policy tool, and are those goals even valid for this policy instrument? The byproduct of historical political manoeuvring, regulatory red tape, and corrupt lobbying has been:

a gigantic web of mess which, even for bare minimum compliance, can not be navigated without help from professionals (read CA, CFA);
inspector raj, regulatory red tape and corruption economy;
political ploys for favorable voting trends and lobbies to extract systematic favors.

So let’s start with quickly understanding the complexity of taxes in India, followed by first-principles reasoning to figure out how to cut the fat!

Tax Payer Identities & Liabilities

Do you exist? I mean, I know you’re reading this, but are you a legal person? Do you think, therefore, you exist as a legal person…? Asking because many kinds of legal persons cannot think, yet they exist. This is not an off-color joke but a remark about different types of Indian Permanent Account Number holders. Shorthanded as PAN, it is a 10-digit unique alphanumeric number, the fourth character of which signifies the type of taxpayer that legal person is. These can be individuals, groups of individuals, or imaginary legal entities:

A - Association of Persons (AOP)
B - Body of Individuals (BOI)
C - Company
F - Firm/Limited Liability Partnership
G - Government Agency
H - HUF (Hindu Undivided Family)
L - Local Authority
J - Artificial Judicial Person
P - Individual
T - Trust

The PAN holders have to account for their tax liabilities at least annually, if not monthly. These tax liabilities have been defined in the constitution of India, featuring:

Union List: (Section | Tax Name | Description // Nuance)

82 | Income Tax | // except agricultural
83 | Custom Duty | On imports/exports
84 | Excise Duty | Collected at point of manufacturing // on petroleum and tobacco
85 | Corporation Tax | On income/capital of corporations
86 | Property Tax | On the capital value of assets // except agricultural land
87 | Estate Duty | Tax on money & property of dead // except agricultural
88 | Inheritance Tax | Tax on inherited money & property // except agricultural land
89 | Terminal Taxes | // on travel / transport via rail, sea, air
90 | Stamp Duties | // in stock exchanges & futures market
92A | On interstate Sale/Purchase | // other than newspapers
92B | On interstate consignment
97 | Residual Union List

State List: (Section | Tax Name | Description // Nuance)

45 | Land Revenue | // land-related revenues
46 | Agricultural Income
47 | Inheritance Tax/Duty // of agricultural land
48 | Estate Duty | // for agricultural land
49 | Property Tax | // on lands and buildings
50 | On mineral rights
51 | Excise Duty | // on alcohol and narcotics
53 | Electricity Duty | // on consumption / sale of electricity
54 | Sales Tax | // on human retail of petroleum and liquor
56 | Transport / Travel Taxes | // for roads / inland waterways
57 | Road Tax | // on vehicles which will use roads
58 | On animals and boats
59 | Tolls | The fee to access certain passage
60 | Profession Tax | // on organised professionals
61 | Capitation taxes | Fixed sum tax on each individual
62 | Entertainment Tax | // levied by local / regional bodies
63 | Stamp Duty | On the sale of land/property

And now also Goods & Services Tax central, state & integrate components.

Easy, right… but it doesn’t stop there. These taxes can be further sliced and diced based on:

nature (ad-valorem vs per-unit)
incidence (direct vs indirect)
taxable event (supply, assessment, transaction, import, etc.)
marginality (vertical equity)
exemptions (horizontal equity)
frequency of incidence (one-time vs recurring)
frequency of collection (transactional vs periodic)
jurisdiction (municipal, state and/or union)
type of money flow, tax rates, subsidies, deductions, cess, and again, the list goes on.

That’s a mouthful! To understand the fractal of this complexity, let’s take up Income Tax & Corporate Tax for an exhibit for deeper consideration.

Income Tax

While the introduction of the new tax regime has attempted to simplify things a bit, the old regime still exists proudly and is actually the default choice for many. This says a lot more about the failure of the new regime and lack of clarity while devising it than it says about the ‘goodness’ of the old regime. What are the issues with the old regime? Well, before we go there let’s understand how it works.

Section 4 of the Income Tax Act, 1961 says -

Tax shall be charged for any Assessment Year [Sec 2(9)] at the rate prescribed on the Total Income [Sec 2(45)] of the Previous Year [Sec 3] of every Person [Sec 2(31)]

Where below is the meaning of above mentioned terms:

Fiscal Year: April to March annual cycle for financial calculations
Person: Any legal entity (individual / other pan categories) capable of earning income
Assessee: Person who has potentially earned income in the previous fiscal year
Assessment Year: Fiscal year in which tax assessment is performed for Tax Period of Previous (fiscal) Year

Now the Income Tax Act is not as straightforward as we would wish it to be. There exists a high-level depiction of different variables to be considered as per the associated section of the Income Tax Act. This still excludes additional dimensions and nuances like special flat-rate income, etc.

These tax liabilities further have requirements around timelines of tax assessment and payment, which also has complications around the advance payment of the estimated liability, and penalties on deviations, etc.

There is more to it, but you get the point. It keeps going!

Is this complexity even needed?

From the point of view of a tax-payer, all of this is nowhere close to being user-friendly. Furthermore, neither is there enough transparency, nor any leverage around what changes are your taxes driving - which becomes a special point of contention for many taxpayers. While we would prefer and should demand an end-user experience as simple as Ludo, we instead get a DoTA where a Chartered Accountant is carrying you throughout the game. Pardon my French. But because of this, as a second-order effect, we get a lower and disproportionate tax base due to perverse compliance incentives.

Here’s a breakdown: For FY20, gross tax revenue was over Rs 24,23,020 Cr. That’s a lot of money. But when you look at the income tax filings, things get a little crazy. Out of 5.8 Cr ITR filed, only about 5% are contributing to 90% of total income tax collections! We see a severe form of the Pareto principle at play. Meaning? A very small group of people are shouldering most of the burden. Moreover, to put it in plain English, India in 2019 only collected about 20% of its total taxes from individual income tax liability. And that money is being collected from just 1.1% of Indian citizens. Out of a population of 130 Cr, only about 6 Crore citizens file Income Tax Returns, out of which actual income tax is paid by just 2Cr Indians with income above 5 Lakh. And of those 2Cr taxpayers, only 5% are responsible for 80% of tax receipts. (Data Source)

It’s all a bit ridiculous when you think about it. Even if we look at the latest numbers from AY 2021-22, we can have no income tax on taxable income under 10 Lakh and would still retain 90% of our income tax collection! Make that 80% for 20 Lakh income cut-off. It sounds like a middle-class consumption dividend waiting to be unleashed; Maybe not, but one way or another this begs the question of the effectiveness of our tax policy. Do we really need such a convoluted and complicated tax policy for governing just 2% of the populace? If the policy is forcing a layperson or a young entrepreneur to hire an expert to do bare minimum compliance, why can’t that legal person then just hire an expert to rather game the system or just not comply? A quick exhibit of gaming the system: agricultural income. The data excludes agricultural income data because it is under state’s purview. Incidentally, agriculture is contributing just 15-20% to India’s GDP, while having value capture concentrated in the hands of few compared to the 50% population part of the agricultural workforce.

Maybe we can just do away with these different rate tiers for some illusion of progressive policy making and simply give a basic deduction of 10L to everyone! Abstract it out one layer above, maybe we can simply target 1 -2 Lakh of tax credits per household which they can use to pay tax liabilities coming from a flat rate income tax! Or if they are so poor to still be left with something, maybe they can use the same tokens to pay for GST taxes on consumption as well, or pay for that school fee voucher for a charter school. Do you see where I am going with this? But before we dive deep into this parallel tax voucher currency for the welfare economy, let’s also look at the corporate tax.

Corporate Tax

Corporate taxation in India is no stranger to complexity as well. There are a plethora of exemptions, incentives, and schemes to navigate through. From minimum alternative tax (MAT) to the tonnage tax scheme and dividend distribution, there are plenty of hurdles for companies to overcome. For this section, I have borrowed parts of the write-up from the great interweb 2.0.

A corporation is an entity that has a separate and independent legal entity from its shareholders. A company is just an incorporated entity - a corporation brought to existence from ether! There are broadly two categories of companies from a tax point of view:

A domestic company is registered under the Companies Act of India or a company registered in foreign countries but with the Indian arm’s management & control wholly based in India. A domestic company includes private as well as public companies. A domestic company is taxed on its universal income.
A foreign company is incorporated overseas and has at least some part of control & management located outside India. A foreign company is only taxed on the income earned within India i.e. income being accrued or received in India.

So how do companies actually earn income? Well, there are a few ways… 1) Profits earned from the business, 2) Capital gains, 3) Income from renting a property, 4) Income from other sources like dividends, interest etc.

According to this PWC document, the corporate income tax (CIT) rate applicable to an Indian company and a foreign company for the tax year 2020/21 is listed.

There are many more layers of nuances on top of this base. Though, it’s worth noting that, unlike some other countries, India doesn’t levy any local, state, or provincial taxes on income - a welcome relief for businesses operating in the country. However, the classification of different types of companies is a source of confusion and could benefit from rationalisation. All in all, the corporate tax landscape in India is one that requires careful consideration and expertise to navigate successfully. Certainly not that business-friendly for sure, which is one of the reasons why the near majority of MSMEs prefer to operate in black, leading to a much larger chunk of the informal economy waiting to come back to formal fold if given right and sensible incentives.

Other Taxes and Globalization Challenges

Just like Income Tax, other taxes in India - rather, globally - follow a similar storyline; a complicated regime with ever-changing compliance and nuances.

The trifecta of personal income tax, corporate income tax, and goods & services tax account for the majority of union and state taxes in India, all of which are both impacted by and impact the business environment and activity in the nation. Furthermore, any instability or uncertainty, be it short-term or long-term, is detrimental to business confidence and trust in the regime. We have many examples of these uncertainties, time and again teaching us that Trust and Safety are foundational to further enterprising investments of labour and capital. Change doesn’t need to be the only constant, always. But when it is, incentives to game the systems are always at high. Even better - rig the system and corrupt it with cronyism, lobbying, bureaucratic red tape or inspector raj! A lifeline and purpose to the infamous Indian shadow economy. This also links to urbanism as certain capital gains tax exemption on reinvesting funds into real-estate make it a very lucrative choice to park capital, despite low yields and high shadow component of transaction. The second order effect of this is faster degradation of agricultural land into empty plots as well as higher rent and buying prices for existing homes!

And let’s not forget about the challenges posed by multinational ownership and rampant digitization of consumption. MNCs and their tax avoidance present further complications to every nation’s tax policy. With say a US firm serving clients in Luxembourg sitting in the UK while assembling products in India but with patents stored in Ireland, determining the fair share of taxes to pay is not an easy feat. The demand for a global digital tax under the OECD and G20 has been growing, indicating that tax officers worldwide are not happy with the current norms at MNCs and their sophisticated tax ‘savings’ (read ‘evasion’.) A ‘hot topic’ in international politics and public policy, if I may.

There have been recent developments on a global minimum tax, though they are seeming to concentrate more on benefits to the developed world - and their fiscal & monetary policy preferences - leaving others at their behest. In parallel, the world is also looking at discovering reserve currencies beyond the dollar hegemony, with the Euro being an earlier push and now BRICS and GCC taking note. These movements are yet to assimilate with digital native approaches as promoted under the umbrella of web3, therefore there is potential for way more progress.

In this complicated web of globalized value chains, I do wonder about a blasphemous thought - what role can a tax on foreign exchange transactions play? Could it serve as a proxy to identify value proportion and economic and supply chain resiliency? Of course, this idea is not without macroeconomic, monetary policy, and international relations considerations, which I hope to cover in future posts.

So before we move to the next part, let’s agree on the fact that the current tax regimes and the meta processes to change that regime might have graver unintended consequences than nobler intended ones; this thus begs further exploration!

Authored by Moberation. Published by Brhat.