Dr N Balakumar

Preamble

In India, the social objective has been rapid economic growth with equitable distribution. For reconciling the claims of growth and equity in a democratic framework, the concept of welfare state has been incorporated in the Indian Constitution.

The unmistakable emphasis placed on reducing economic inequalities in the Plan documents implies that the existing inequalities were regarded as socially undesirable. The objectives of reducing economic inequalities in the Indian context has been specified in four different forms:

1. Reduction in the concentration of economic power;

2. Reduction in the (relative) disparities in earnings;

3. Reduction in the (relative) disparities in income and consumer expenditure; and

4. Reduction or eradication of absolute poverty.

Direct Tax as a Tool to Reduce Economic Inequalities

Various monetary and fiscal policies were used as tools for the purpose of reduction of inequalities. Fiscal policies besides promoting development, has something to its credit by way of increasing social welfare. By and large this has been achieved through two types of measures, namely, those which have raised the economic status of the weaker sections of the population, and those which tended to reduce the inequalities and wealth.

Direct taxes are used as a tool to reduce economic inequalities. Some of the direct taxes are: income tax, profits tax, capital gains tax, etc. These taxes help to reduce the gap between haves and have-nots.

Are these direct taxes are really direct in nature is one of the basic fundamental question which arises due to the prevailing socio-economic environment over the past 50 years. Whether direct taxes were able to achieve what they are suppose to? No! is the spontaneous answer. Because, direct taxes in India, indirectly functions as indirect taxes, that is, the burden of those taxes can be and has been transferred to the consumers. How?

Transferring the Direct Tax Burden to the Consumers

Let us take one direct tax - tax on profits earned.

The main objective of a businessman or a firm is to maximize profits. Business community is aware of the fact that they have to pay taxes on profits earned; and they too knows the prevailing tax rates.

A prudent businessman wants to pay his taxes; and at the same time is not willing to agree on any reductions in his future profits. So, here is the logic: He calculates approximately, at the beginning of the financial year, how much he has to pay as tax for the following accounting year. These calculations can be projected comfortably, with past data, future expectations and his experiences, with the advanced statistical models available.

After projecting the future amount of tax he has to pay, he adds his prices and he tries to earn more for the purpose of paying his tax which is supposed to be a direct tax. So, actually in reality he not only makes his estimated profits, but also some extra which he can pay as taxes and by doing so, he does not loose anything.

Let us view an example.

Let the tax rate be 10 per cent. The estimated profits are at Rs1,00,000. So, he has to pay Rs10,000 as his direct tax, by which he will have Rs90,000 at the end. Any businessmen does not like to loose.

So, he will fix his profit target as Rs1,10,000. Now, the tax amount will be Rs11,000. Now, he is left with Rs99,000, as against Rs90,000.

Therefore, by fixing two targets the business community bears only 1% of the tax and shifts the balance 90 per cent to the consumers. If 90 per cent of a tax can be shifted, can we call such tax as a direct tax?

Concluding Remarks

If the burden of so called direct taxes can be shifted, how can we say that we use direct taxes as a tool for the purpose reducing economic inequalities?

Further, if the purpose is not fulfilled, why continue the same? You may discontinue all forms of direct taxes and allow the enterprise to grow.