The income-tax deduction that shows up in the salary slip really hurts. What that money could have done to ease up consumption and investment needs is a frustrating thought. Especially when the taxpayer sees the government missing from his average daily life in the absence of efficient water, power, security, urban transport and housing facilities.
Party pooper? From buying a television to watching a movie in a cinema hall, you need to pay tax on all goods and services you buy, irrespective of your age. Photos by Namas Bhojani / Bloomberg, Priyanka Parashar / Mint and Madhu Kapparath / Mint.
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But have you ever thought about what you really pay as your total tax bill? We are aware only of the direct taxes we pay, which is income tax, but there is another tax bucket called indirect taxes, which is also filled with our money. Customs, excise, value-added and service taxes make up the heads under which we pay additional tax to the government. We pay these on the basket of goods and services that we buy every year.
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Because the tax is embedded, we don’t always know what it costs us. For example, did you know that each litre of petrol we buy would cost us half if we took the taxes out of the final price?
To compute the total tax hit that we take each year, Money Matters looked at an average household at three levels of income, which correspond to different income-tax rates. Next we looked at their average consumption baskets and put a tax number against it. Then we added the two to reach the final figure. This is our total tax bill to the government.
Since the direct tax incidence differs across gender and age, we took three faces to represent an average household at an annual income of Rs5 lakh, Rs10 lakh and Rs20 lakh—for a woman under 65 years of age, man under 65 and a senior citizen over 65 years of age.
The Delhi-based economics research firm, Indicus Analytics, gave us an average break-up of a consumption basket at these three levels of income. The three items on which people spend most are the same for each category: travel to work and within the city, consumer services and rent. But after the top three, the trend begins to vary.
If the Rs5 lakh household spends on basic food and vegetables, the Rs10 lakh and Rs20 lakh households spend on fruits and vegetables and education.
Next we got the tax consultancy, BMR Advisors, to work in the tax rates—both direct and indirect—to give us a consolidated number for tax paid by each household.
The results are not surprising: The people at the lower end of the income pyramid end up getting hurt more from indirect taxes than those who are richer. Though we get a uniform 7-7.5% incidence of indirect taxes on the three income categories, the effect is much sharper on a household at a lower income base compared with the income-tax incidence.
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The average income-tax paid is 7% for a Rs5 lakh household, 18% for a Rs10 lakh household and 24% for a Rs20 lakh household—this is fair on a progressive system of taxation.
However, for the Rs5 lakh earner, the tax bucket more than doubles with the weight of indirect taxes. For the Rs10 lakh household, indirect tax is around 30% of the total tax paid. On the other hand, for the Rs20 lakh earner, indirect taxes are just about 20% of the total taxes.
While there is nothing much we can do about what we pay to the government, it does help to know what we pay.
SOURCE: Tax data and analysis by BMR Advisors ; consumption basket data from Indicus Analytics