Written by: Anjali Tripathi
Only a few days left for the Union Finance Minister, Mrs Niramala Sitaraman, to announce the annual budget of India. This time the budget is not only noteworthy because it is being announced in India’s 75th year of independence but because it would also provide India with an opportunity to battle the current economic depression owing to the pandemic.
Last fiscal year saw a great decline in people’s incomes, and several households lost their loved ones too. In the upcoming budget, people have high hopes from the government and the Ministry of Finance.
Amidst the various speculations floating around regarding the components of the budget, a new form of tax has also found its place. When the government asked for suggestions from the general public and stakeholders, the term “expenditure tax” started making rounds.
Let us see what expenditure tax is and if it will be beneficial for our economy.
What Is Expenditure Tax?
Expenditure tax, as the name suggests, refers to the tax imposed on the expenditure made by a person. In general parlance, we pay tax on purchases in the form of Value Added Tax or Goods and Service Tax, which are indirect forms of tax.
However, these can’t be equated with expenditure tax as expenditure tax is a direct tax imposed on the total amount of expenditure incurred by an individual during the financial year.
As of now, we pay income tax as a direct tax. Tax slabs are predetermined and are revised mostly in every budget. Depending on the tax slab in which an individual’s income falls, they have to pay tax.
A certain threshold of income is tax-free and beyond that, tax is applicable on a percentage basis on the amount in excess of the nil amount or the amount taxed in the previous slab, as the case may be.
Confusion, right? Income tax, without any doubt, is confusing. Though the governments so far have tried to simplify it, the calculation part of it has always remained complex and will always remain so. Thus, in an attempt to simplify the process, expenditure tax is likely to be introduced.
With expenditure tax, now you will have to declare your expenses and will be taxed on that. Thus, people with higher spending will be taxed more and middle-class salaried people who spend less will have leverage here.
This is also important because, for income tax, salaried people have to pay the tax deducted at source while businessmen find loopholes to avoid taxes.
Will Expenditure Tax Be Beneficial For The Economy?
The Indian economy is going through a slump. Income is less, which has resulted in lower expenditure by people, thus, resulting in lesser liquidity in the market. To boost the economy, more flow of money would be required and there are two ways to infuse that.
The first way to do that is to bring investment, but the economies around the globe are also suffering, so expecting foreign direct investment might not be viable. The second option is to make people spend more and save less. This can be done by reducing interest rates on loans, reducing interest rates on deposits, etc.
However, with expenditure tax, people will be reluctant to spend more and will be inclined towards saving a greater part of their income. This will defeat the purpose of infusing capital into the market as there would be lesser expenditure. Thus, the economy will not benefit at all. Instead it will be disadvantageous for the economy.
Secondly, the greater concern I have is regarding a parallel economy. The Indian government introduced the demonetisation scheme with the sole purpose of killing the parallel economy of India.
However, tax on expenditure will incentivise people to spend without taking a bill for it. In turn, this amount will go untaxed, as no one wants to pay tax twice on the same expenditure, and will contribute towards the ghost economy, also known as black money.
These two problems, in my view, are the biggest issues with expenditure taxation and because of these, they should be avoided. Or else, if it can’t be, then an option between income tax and expenditure tax should be given so that the uncertainty caused by frequent changes in law can be avoided to an extent.
Note: The article was originally published here.