Tax the poor to help the poor, a difficult balance.

Like any company sets targets on sales people the government sets targets on the tax department to arm-twist as much money as it can out of hapless citizens. Unfortunately, vast majority of citizens are too poor to pay income tax so last year there was a shortfall of Rs 300-350 billion in revenue collection, which upset the Revenue Secretary. Unless we pay up the humongous pay rises of civil servants, as recommended by the Seventh Pay Commission, will raise fiscal deficit, which will give the opposition a chance to criticise the government. Not good. So our income tax fellows came to an arrangement with the State Bank of India, which has assets in excess of Rs 20 trillion, which paid Rs 100 billion on 30 March, 2016. On 1 April, the first day of the new financial year, the tax department refunded Rs 95 billion to SBI. In total tax fellows refunded Rs 250 billion in the first week of April. Two tax officers were transferred for this sleight of hand, causing resentment among tax fellows. The Indian Revenue Service Officers Association has passed a resolution accusing the revenue department of going beyond its mandate. They have a point. The tax department paid back Rs 1.22 trillion in 21 million refunds last year. Why? Because the government collects excess of taxes to meet its expenses, in what is known as TDS, or tax deduction at source. Last year indirect taxes, which comprise taxes on goods and services, raised Rs 7.12 trillion out of a total of Rs 14.54 trillion. This means that direct taxes, comprising of income tax, corporate tax, wealth and capital gains taxes raised Rs 7.42 trillion. About 4% of Indians file income tax returns and only about 1% actually pay taxes. In 2001, direct taxes contributed 36.31% of total taxes, rising to 37.7% in 2013, while in the US the share of direct taxes was 75.8% of the total. Rates of indirect taxes were raised in 2012 as well as the number of services that were to be taxed and this government has increased rates from 12.5% to 15%. Despite this, or maybe because of higher rates, the share of indirect taxes has fallen and the share of direct taxes has increased to 51% of total taxes. Various governments have tried to unify all indirect taxes under a Goods and Services Tax regime but this has been opposed by states who see a loss of powers to raise revenue. High rates of indirect taxes are seen as regressive because even those who are too poor to pay income tax are compelled to pay taxes on goods and services. Many countries already operate some form of GST but India is more complicated than most countries because we have a plethora of political parties who compete to win elections by promising ever increasing handouts, 'to help the poor'. Which means they are hungry for more taxes. If there is a cap on GST it may impose discipline on politicians. We live in hope.