In a recent debate between Union Finance Minister Nirmala Sitharaman and Opposition MPs on price rise, Ms. Sitharaman said the States should do more, ignoring the fact that the reduced fiscal autonomy of the States gives them little leeway to do much. Similarly, the increasing reliance of the Union government on indirect taxes such as the GST has directly contributed to price rise and inequality. But despite reduced fiscal autonomy, States such as Tamil Nadu and Kerala have contained price rise and inflation through targeted interventions.
Growing inequality
Adam Smith had argued that taxation per se is not bad, but should follow the principles of fairness. Fairness, in taxation, should be compatible with taxpayers’ conditions, including their ability to pay in line with their personal and family needs. However, the Union government’s increasing dependence on indirect taxes has removed any ‘fairness’ in taxation. The share of indirect taxes of the gross tax revenue in FY2019 increased by up to 50% compared to 43% in FY2011. Compare this with the OECD countries, where indirect taxes on average do not contribute to more than 33% of their tax revenue. Indirect taxes are regressive because they tax both the rich and the poor equally.
