This article has been written by Utsav Pachouri pursuing Diploma in Advanced Corporate Taxation and Tax Litigation and edited by Shashwat Kaushik.

This article has been published by Sneha Mahawar.

Introduction

Have you ever noticed why rich individuals and corporations end up paying heavy taxes and poor people pay no tax at all? We can also ask ourselves  what the role of tax collection is. In simple terms, we can say that taxation is a method for wealth distribution. This means that tax that is collected by the government from wealthy individuals is used for the welfare of less fortunate individuals. We use a tool that is used by the government to reduce wealth inequality and ensure the distribution of opportunities and resources. This tool is known as wealth distribution.

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In India, the main tool of wealth distribution is tax collection. The Government of India collects taxes and later uses them for the betterment of society, especially for the poor. This tax is imposed as per the Income Tax Act of 1961. This involves a pre-decided percentage of income, which a person has to submit to the government as tax. These taxes are later used for the sustainable development of society. 

In this article, we will understand the role of taxes in wealth redistribution. We will also try to understand how India adopted wealth redistribution, which later benefited society. We will understand the strategies and challenges of taxation in wealth redistribution. 

Understanding wealth inequality

Wealth equality in India is quite uneven. We use the Geni Coefficient to understand the growth in income inequality. In recent reports, we can see that the top 1% of Indian citizens, according to wealth, constitute more than half of the country’s wealth. This indicates that income inequality is very high in India.

Now, we will get to know and understand the reasons behind the income inequality in India, as we discussed above. These are the following reasons for income inequality in India-

  1. India has been developing in recent years, and the main reason for that was the economic development of the country. This economic development distributed wealth unevenly among the citizens, thus causing income inequality.
  2. High population growth in recent years has caused urbanisation in rural areas. So, these urban areas offer a high level of income in comparison to rural areas, which creates income inequality. 
  3. There has been caste-based discrimination since the formation of independent India, which has become a hindrance to education for lower castes. That further disables them from getting a good earning job and thus creates income inequality.

We have discussed the reasons behind the income inequality in India. Now, we will be discussing the consequences of income inequality as follows-

  1. As income inequality increases in one country, it simply means that the money is concentrated among a particular number of people in the country. When wealth is in the hands of a handful of people, it can create a lack of resources  for a large section of the population. This increases poverty in a country.
  2. When there is an extreme condition of income inequality in a country, it affects the Human Development Index (HDI) of the respective country. The Human Development Index is an index of multiple factors. High levels of wealth inequality can lower a country’s HDI score.

Taxation and its types in India

We will discuss a strong way to share money more evenly in India, which is tax. Taxes are like a payment that the government collects from people and businesses. They take this money and use it for the better development of society. This creates a positive impact, which ensures that everyone has a fair share of money in our community. In India, there are different types of taxes. There are direct taxes such as income tax, corporate tax and wealth tax. Others are indirect taxes like goods and service tax, customs duty and excise duty. All these taxes work in different ways to move money into the country.

We will try to understand the different types of taxes that are imposed in India. These taxes are as follows-

  1. Direct taxes are the main type of tax that is used in India. They are taxes that you  pay directly to the government. Think of income tax—it’s deducted from your salary before you even receive it. Wealth tax, property tax, and capital gains tax are also examples of direct taxes.
  2. The other type of tax that is used in India is indirect tax. Indirect taxes can be more difficult to understand because they are not paid directly to the government. Indirect taxes are collected by someone else, like a shopkeeper and then passed on to the government. You pay this tax when you buy things or use services.
  3. Progressive and regressive taxes- taxes can also be categorised based on how they affect people. Progressive taxes are the taxes that take a larger percentage of income from the rich. India primarily uses a progressive tax system to promote fairness.
  4. Central and state taxes in India- These are the taxes that can be levied by both the Central and state governments of India. Central taxes, like income tax and customs duty, apply nationwide. State taxes, such as the state sales tax, have differences from state to state.

Historical perspective of taxation and wealth redistribution

To gain a better understanding,  we  need to delve into the past of Indian history regarding the tax system. In India, looking at how taxes have been used to share wealth has a long history. From ancient times to the colonial period of British rule in India, the concept and practise of taxation have undergone many transformations.

India’s taxation history is marked by several key milestones.

  1. The journey began with the introduction of income tax by James Wilson in 1860, during British rule. This was a significant step towards formalising the taxation system.
  2. The Central Board of Revenue was created in 1924 to make collecting taxes and managing them easier.
  3. After India gained independence, they made a new law called the Income Tax Act of 1961. This law still controls how people pay taxes in India today.
  4. The introduction of the Goods and Services Tax Act of 2017 brought significant changes to the indirect taxation system of India. The objective behind this reform was to establish a market throughout the country.

Modern taxation system and wealth redistribution

The Government of India imposes two main kinds of taxes, i.e., direct  and indirect taxes. These taxes generally range from 5% to 40%. Within this system, there are also opportunities for tax exemptions and deductions that could potentially lead to instances of tax evasion.

In India, the tax is enforced and carried out by authorities who face their share of challenges, including low compliance rates and corruption. It is worth noting that the tax system significantly impacts wealth redistribution in the country; it has the potential to either reduce or exacerbate existing inequalities and poverty levels.

The Indian Government helps share money more evenly among people by using taxes. The taxation system implements schemes like MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act), PM KISAN (Pradhan Mantri Kisan Samman Nidhi) and PM JAY (Pradhan Mantri Jan Arogya Yojana) that aim to benefit sections of society. These schemes are supported by sources of tax revenue.

The tax system in India is what makes everyone follow the principles of equity, efficiency, simplicity, transparency and accountability. This ensures that tax is not generated as a source of revenue but also contributes towards economic goals by promoting fairness in wealth distribution while being effective at achieving its objectives.

Overview of the current tax system

  1. The Indian tax system is quite difficult to understand for common people.
  2. Some people and industries get tax exemptions to promote certain activities.
  3. How well the government enforces tax rules can vary, affecting who pays and who doesn’t. This complexity plays a big role in how wealth is shared in India.

Government’s role in wealth redistribution

  1. The government is a key player in spreading wealth more evenly through taxation.
  2. They use their financial policy to help make sure that money is shared fairly and that society’s well-being improves.
  3. India has programmes like MGNREGA (guaranteeing rural jobs), PM-Kisan (aid to farmers), and PM-JAY (health insurance) to help those in need.

Conclusion

In India, taxes are used to share money more evenly and make things fair. A tiny group of super rich people have most of the country’s money. This makes life really tough for everyone else and makes poverty even worse.

To address this concern, the government employs taxes such as income tax and Goods and Services Tax (GST) to impose burdens on the affluent while assisting those who are less fortunate. Some individuals benefit from tax breaks, and not everyone fulfils their share of contributions.

Additionally, the government initiates programmes aimed at supporting populations by creating employment opportunities in areas and extending aid to farmers. This collection of taxes helps in decreasing poverty and enhances people’s quality of life.

In essence, taxes serve as a mechanism employed by the government to ensure the distribution of wealth. When executed appropriately, they can contribute towards establishing a society that’s both more egalitarian and prosperous.

References

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