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How much tax do you really pay?
January, 17th 2009

Every year, at the annual budget ritual, we routinely switch off till the Finance minister utters the fateful words: direct tax, or income tax. Then we perk up, at least long enough to groan or curse the minister for increasing our tax burden. But did you know that this was really the good news? The bad news is that there's a whole range of hidden indirect taxes that can make an even larger hole in your wallet and you don't even know about it. Our calculations indicate that the impact of these taxes can be at least 6% of your income. Experts contend that it may be as high as 10-15%. The overall Tax burden on you can be as high as 25-33%, even if you make all the right savings.

Axe the tax

What is indirect tax? It's the tax levied on service providers and manufacturers of goods; they are expected to cough up a certain amount, which they pass on to consumers. But what about stuff like toothpaste and edible oil, which are sold on the basis of the maximum retail price (MRP) printed on their packs? There's no tax added to the grocery bill, is there? Oh yes, there is. A tax component is built in, even in the MRP. The average incidence of aggregate indirect tax on goods in India is around 24%, says S. Madhavan, executive director, PricewaterhouseCoopers. In plain English, this means that almost a quarter of the price you pay is actually tax. In some cases, there's also a retail sales tax.

Such indirect taxes are great levellers unlike income tax, where how much you earn determines the tax you pay. Indirect tax, like the law, is blind. Whether you earn Rs 10,000 a month or Rs 10 lakh, you're still going to pay that 24% tax on a tube of toothpaste. But sales tax is just one of the several indirect taxes. There's value-added tax, entertainment tax (when you eat out or go for a movie), road tax (if you own a vehicle), property tax (if you own a house or shop), interest income tax, excise duty and customs duty. While the union Government collects income tax, central excise and service tax, the state governments levy taxes on land revenue, value-added tax (VAT), stamp duty, etc. The local bodies are responsible for water tax, octroi and many other taxes.

The Federation of Indian Chambers of Commerce and Industry (Ficci) had commissioned a study in 2007, which reported that because of the cascading effect of various taxes, about 35% of the final consumer price is taxes. The total incidence of indirect taxes as a percentage of selling price, according to the study, is over 40% for consumer & amp; capital goods and 30% for basic and intermediate goods. And then there are charges levied by private organisations like hotels (service charge) and airlines (congestion surcharge, etc).

Even within the tax structure there are surcharges and fringe benefit tax. Any figures of the ultimate burden of indirect taxes on the consumer are mostly estimates because apart from customs and excise duties and service tax, most of the indirect taxes are charged by states and, therefore, vary from state to state, says tax expert Girish Ahuja.

Here's how it works. Assume you own and live in a small apartment. You have to pay property tax regularly, apart from a one-time stamp duty that you paid when registering the house. You also pay a service tax on municipal charges as well as a monthly maintenance charge paid to the housing society. Your monthly electricity bill has a surcharge. If you own a vehicle, you would have paid sales tax and road tax, and for petrol you pay sales tax again (for the centre and the state governments). If you go out on a vacation, your hotel bill includes a 10% luxury tax, 12.36% service tax and 12.5% VAT (for a detailed list see table). And then there are the everyday products that you use, from your toothbrush to the clothes you wear, for which you pay sales tax or VAT.

The amount of tax you pay also depends on where you live. For instance, the luxury tax component can vary from 40% (in Punjab) to 25% (in Gujarat) and 20% (in West Bengal). The same holds true for hotel stays. While most state government levy luxury tax on hotels with room rents over Rs 2,000 a night, some like Punjab levy it at starting rates of Rs 200 a night. This disparity may end if the dual goods and services tax (GST) system is introduced according to plan by April 2010. The dual GST model would subsume central excise duty, service tax and VAT, and come with two tax rates: one that will be charged uniformly across the states and the other by the union government.

As your income goes up, you realise that your lifestyle has changed and you start buying more luxury goods and services, which are taxed more than essential commodities. This is because these products attract taxes such as import taxes, luxury tax and expenditure tax. And some of these can go up to 100% of the cost of the product. So, while everyone pays more or less the same as taxes when it comes to basic consumption items, it is the discretionary and luxury items that are taxed the most and this hits you as you go up the income ladder.

Taxes are also used as a means of 'social engineering'. Taxing alcohol, for example, supposedly curbs excessive drinking. Thus, in many states, taxes make up about 60% of the retail cost of beer. Heavy taxes are also levied on tobacco. Then there are duties levied to protect the domestic industry like antidumping duties and countervailing duty (CVD) that ultimately add to the retail price of the end product. Even hotels (service charge) and airlines (congestion charge) impose charges that you cannot avoid. In addition to these, there are costs that are imposed because governments do not deliver to the taxpayer what they ought to. The price of buying and maintaining your inverter or generator would have been non-existent if governments had done a better job of ensuring adequate and reliable power supply. If public transport were what it ought to be, you might not need to buy a car or at least not run it so regularly. The list could go on.

The bottom line is this. The lower income households end up handing over nearly a fifth of their total income to various governments in the form of taxes, while the higher income earners give up a little over one-third of their income in the form of taxes, says tax expert Subhash Lakhotia.

So the next time you are tempted to grumble about the income tax eating a chunk of your salary, take a look at how much tax you are paying when you buy groceries. That's when you realise that however smart your chartered accountant and tax planners are, the government indeed has ways to make you pay.

What Goes Into Govt Coffers

80% of the government's revenue comes from taxes paid directly and indirectly by individuals and corporates.

As the graph shows, the share of indirect taxes (like customs and excise duties) in the government's total tax revenue has been gradually coming down and that of income tax and service tax is increasing.

In fact, in 2007-8, the direct tax collection for the first time surpassed the indirect collection. A steadily growing source of revenue for the government is service tax, which is estimated to grow by 34% in 2008-9. But service tax is also putting pressure on monthly budgets because of its widening scope. From just three areas in 1994-95 it has expanded to cover 100 in 2007-8.

So even as the actual tax rates may be coming down with improving tax compliance, we will continue to see more such indirect, creative ways of taxation (like the fringe benefit tax and the securities transaction tax) as government seeks to widen the net.

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