The latest increase in indirect taxes on commodities like diesel, petrol and alcohol by the central and various state governments is likely to lead to a further rise in the tax burden on India's Gross Domestic Product (GDP). In FY19, indirect taxes (net of subsidies) accounted for nearly 10 per cent of GDP, up from 9.3 per cent a year ago and a low of 6.1 per cent in FY10. This, say economists, will negatively impact household disposable income and may hit consumer demand and savings and investments by the household.
According to the Organisation of Economic Co-operation and Development (OECD), disposable income is closest to the concept of income as generally understood in economics. It measures the income of households (wages and salaries, self-employed income, income from unincorporated enterprises, social benefits, etc.), after taking into account net interest and dividends received and the payment of taxes and social contributions.
"Disposable income is the portion of GDP that accrues to households that they consume, save or invest. If it grows slower than the overall GDP or declines, households will either cut back on consumption, or savings & investments, or both," says Devendra Pant, head economist India Ratings.
According to various estimates central government can earn up Rs 1.7 trillion in additional tax revenues from diesel and petrol in FY12 besides additional revenue mop-up by state governments.
Against this, India’s GDP is expected to either decline marginally or stay stagnant according to various estimates depending on the extent of the Covid-19 lockdown.
In the last five-years, indirect taxes such as excise, customs and Goods & Service tax net of subsidies has grown at a much faster pace than the growth the country's Gross Domestic Product (GDP). The trend is similar in case of direct taxes such as personal income tax and corporate income tax.
For example, in the last five-years net indirect tax grew at compounded annual growth rate (CAGR) of 16 per cent growing from Rs 8.7 trillion in FY4 to around Rs 19 trillion in FY19. Direct Taxes during the period grew at a CAGR of 13.1 per cent from Rs 6.5 trillion in FY14 to Rs 13.5 trillion in FY19 according to figures from Reserve Bank of India.
A faster rise in tax burden led to a steady decline the portion of gross domestic product that accrues to the household. Household disposable income was equivalent to around 85 per cent of GDP in FY19 down from 85.5 per cent a year ago and a high of 90 per cent in FY09.
In the same period, India gross domestic product at current prices grew at a CAGR of 11 per cent while private final consumption expenditure grew at a CAGR of 11.7 per cent while household savings grew at a CAGR of 8.6 per cent.
“In general household held-up the consumption by cutting back of savings and increase in borrowings that showed-up in a boom in retail credit in the economy,” says Dhananjay Sinha, head research Systematix Group.
Others fear that such a high taxation on transport fuel will raise logistics costs for firms hurting the competitiveness of the manufacturing sector in the country. “Diesel prices – the key transport fuel – in India are one the highest in the word which make goods transport very expensive. How will an Indian manufacturer be globally competitive if energy costs are 3-4X that of competition?” asks Amit Bhandari, fellow, fellow, Energy and Environment Studies, Gateway House.