To smoothly run the country, India needs tax revenues. These revenues are required by the Government to provide critically required services like Defence, Law & Order (that is, POLICE, INTERNAL SECURITY etc.), Education, Health care, disaster relief etc.
Unlike the Middle East Gulf countries, India does not have surplus crude oil to export.Nor does it have minerals (like Gold, Silver, Uranium etc.) which it can export, in order to earn revenues. Hence, India necessarily needs tax revenues. There are two kinds of taxes which are currently levied – Direct Taxes and Indirect taxes.
So, DIRECT TAXES includes taxes like Personal Income Tax, Corporate Tax etc.
Indirect tax includes GST (GOODS & SERVICES TAX). Prior to GST, the indirect tax included taxes like, EXCISE DUTY, VAT etc. With the introduction of GST, the taxes like EXCISE DUTY, VAT etc. have been subsumed into the GST.
The GST collection is into two parts, viz. CENTRAL GST and STATE GST. So, from the GST collection on a transaction, 50% of the amount collected goes to Central Government and 50% of the amount collected goes to the concerned Sate Government.
For the year 2018-19, India's tax to GDP ratio was 10.9%. This compares negatively with the OECD countries which have an average tax to GDP ratio of 34%.
Thus, there is a tremendous need to increase the tax collections of India.
Here, we will focus on improving the indirect tax collections, that is improving the GST collections of India.
A major hindrance to the Government collecting higher GST is the large number of cash transactions at retail locations across the country (this includes metro towns, small towns, villages etc.). These retail locations include, shops, supermarkets, small sized restaurants, large sized restaurants, medical shops, doctors' clinics, hospitals, etc. When a cash transaction takes place at a retail outlet, it becomes easier to hide the transaction and also easier to conceal the tax payable. To prevent leakage of the tax, it is important to ensure that the sales proceeds at these retail outlets enter the bank accounts of these retail outlets. If these amounts (that is, sale proceeds) enter the bank accounts of the concerned retail businesses, the amounts entering the bank accounts will be taken as incomes for the concerned retail businesses. As a result, the concerned business entities will declare these incomes and will pay the applicable amount of GST and also pay the applicable amount of Income Tax. Based on this trend across the country, the tax collections, especially the indirect tax collections of the country would increase. This is also because today, almost every bank account is linked to the INCOME TAX PAN (Permanent Account Number). In addition, the business accounts are also linked to the GST Number.
Thus we have seen that India's tax revenues would rise if consumers would use digital methods for making payments at all retail outlets.
Now, a critical question arising here is, why would consumers want to use digital payment methods while making purchases from various retail outlets. The consumers would use digital methods only if they get tax incentives for using digital methods.
Currently, the Section 80C of Income Tax Act provides a benefit of Rs. 1,50,000 per year.
So, similar to the Section 80C benefit, the Government can allow another tax benefit of Rs. 1,50,000 per year, for all persons using Digital methods to make payments at various retail outlets. If consumers receive tax benefit (say, up to Rs. 1,50,000 per year) by utilizing Digital payment methods to make payments, then, consumers would actually utilize these Digital payment methods.
Thus, we have seen a possible method to increase the indirect tax collections of the country.
Prof. Pravin Narang
Assistant Professor,
DR V N BRIMS, Thane
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