The Taxes and the Exchequer (9-5-2020)

It is a plain fact that the financial fortunes of Kerala state have been in a dire situation for quite a long time and the onslaught of the pandemic has terribly worsened the situation. The government is finding it extremely hard to make both ends meet with all its major revenue sources having got dried up, albeit for the time being. Even payment of salaries and pensions has become a major challenge. The central government’s financial situation has also been far from comfortable much before the outbreak of the pandemic.

Taxation has been the main pillar of the financial structure of states, with taxes being the major source of their revenue from very ancient times as also in modern times. One aspect which deserves not to be overlooked in a situation where the government is financially in dire straits is the huge chunks of revenue arrears due to the government from corporates, private and public sector organizations and establishments, private firms, business houses etc. These revenue arrears comprise dues of various taxes and other statutory payments and collections on account of gratuity, ESI etc. The distinctive feature of these arrears is that all these taxes and other statutory payments have already been collected from the source and only their remittance to the government is kept pending by those who collected them. In the meantime, these moneys which get accumulated at the level of those who collected them get misused or diverted to other channels. And finally the government gets starved of revenue and the exchequer reaches a precarious position.

In the case of central government, evasion of payment of income tax by certain segments is one of the main factors which seriously affects the revenue and the financial position. The Indian government’s deficiency in governmental expenditures is most notably attributed to wide spread tax evasion. Relative to other developing countries, the fact that India’s income tax comprises only 5% of its GDP is due to the fact that only 2-3% (which is a very low percentage compared to developing and developed countries) of the population is exposed to income taxation. Even though India’s income tax system was instituted in 1922 by the British, the tax history explains a high degree of tax delinquency even today, notwithstanding the efforts of the government. Also India is uniquely vulnerable to any crisis situations like the inevitable lockdown because of the overwhelming dominance of the informal sector and migrant daily wage labourers. It is high time that the government started considering tax evasion a far more serious financial crime in India with rigorous penal provisions and punishments.

Cut to Kerala scenario. The state can definitely improve its financial fortunes. Along with a scrupulous drive to cut costs at all levels and practising austerity in public spending at least for a couple of years, better attention should be devoted to the core issue of addressing the defaulting of payment of revenue collections by the non-individual sectors specifically mentioned above through stringent measures and actions.