PROGRESSIVE & REGRESSIVE TAXATION

PROGRESSIVE & REGRESSIVE TAXATION

TOPIC: Economy

Context- It is a myth that the poor don’t pay taxes as they pay a significant amount through indirect taxes.

Concept-

Some ‘taxing’ issues in India’s fiscal policy:

1. The ‘middle- class’ complain that while they pay taxes, the poor get all the subsidies from the government. This is not true. The poor people pay all kinds of indirect taxes like the GST, excise, and sales tax when they buy goods.
2. Second, all rich people do not necessarily pay income tax. Rich farmers in India do not have to pay any tax on the so-called ‘agricultural income’.
3. Third, tax collections from indirect taxes like GST, Customs duties, sales tax and excise are becoming more and more important relative to direct taxes revenues like personal income tax and corporate profit tax.

What is progressive and regressive taxation?

• Progressive tax: Progressive tax is the one where the tax rate increases with the taxpayer’s income. The correct interpretation is that the tax liability for a taxpayer increases with his income in terms of proportion of income and in absolute amount.
  • Tax burden of the taxpayer also goes up when the tax is progressive.
  • An example for progressive taxation is: 10% tax rate for income of Rs 2 lakh, 20% for Rs 5 lakh and 30% for Rs 10 lakh. Here, the tax liability or the absolute amount as well as the proportion of income to be paid as tax increases with income of the taxpayer.
  • Ideally, the tax system should be progressive, and it should not be regressive.
• Regressive tax: In the case of regressive tax, the tax rate decreases with increase in income. Here, the tax liability of the taxpayer decreases with increase in his income.
  • Or in other words, the proportion of his income to be paid as tax decreases with increase in income.
  • For example, suppose, there is 30% tax for Rs 2 lakh, 20% for Rs 5 lakh and 10% for Rs 10 lakh. Here, the tax liability or the amount of the income to be paid as tax decreases with increase in income.
• The tax rates may be proportional as well. Here, tax rate is same for all slabs of income.
• Ideally, tax revenue should come from the rich people to ensure progressiveness. A progressive tax system is beneficial for the poor people.