Fuel price surge: What India can learn from Biden and Sunak’s tax policies

Source: Business Standard

Relevance – The article highlights the options that government can use instead of increasing oil prices.

Synopsis: Government should tax the rich to find alternate avenues to raise public resources. When the times change, the policy has to adapt

Background

• Even when the second OPEC-driven oil shock sent international oil prices past $30 per barrel in 1980, India’s petrol price was raised by Rs 5.10 per liter.
• It was no different in 2014. International oil prices had crossed $100, but India’s petrol price was a little over Rs 70.
• It is the opposite today, only because excise on petrol has been trebled per liter, and that on diesel multiplied six-fold.
• Central revenue from taxing petroleum products has multiplied more than five-fold in these last seven years. But there is a danger to such single-source revenue dependency.

Why India should find other avenues to raise revenue resources?

• First, the tax to GDP ratio is decreasing. This year’s central tax revenues were 9.9 percent of GDP. Before 2014, it was 10.1 percent.
• Second, by 2022, the states will run out of their five years of guaranteed 14 percent annual GST revenue increase. Rates have to be rationalized, and the average GST rate has to be raised closer to the originally intended level as soon as the current slump is over. This will result in decreased revenue resources in the near future.

What needs to be done?

• India can learn from the experience of Joe Biden in the US and Rishi Sunak, Britain’s finance minister. Both have taxes that are progressive in that they hit the rich, not the poor
• For instance, Biden has proposed to double the tax rate on capital gains, increase the income tax rate for the top tier, and raise corporate taxes.
• Sunak too has said he will raise corporate tax rates after the immediate economic slump is dealt with.
• Both Mr. Biden and Mr. Sunak have reversed the trend in their countries of steadily lowering rates.

Way forward

It is the logical and indeed the obvious thing to do in India. There is no other way to address the tax-GDP ratio and find the money needed urgently for defense, health, education, and infrastructure. Even more, borrowing would push up interest rates and will take the level of public debt to dangerous levels.