Maha Bharat: Episode 6

What happens to your taxes?

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Who likes paying taxes? For centuries, citizens, under different political systems, have been grudgingly paying taxes either to kings or to governments. But ever wondered why we pay a tax? And more importantly, where that money actually goes? This episode answers these questions.

Show Notes

All clips and voices used in this podcast are owned by the original creators

We thank wholeheartedly our guest who appeared on this episode:

  • Pallav Narang

Links to clips used in this episode —

Full Transcript of Episode 6

There’s a saying in English that goes like this: Only two things in this world are absolutely certain: one is death and the other is taxes!

And if you think about it both these things cause us a lot of grief.

Today, I’ll talk about one of them, no, not Death, but Taxes.

Taxes.

The question I’m asking in this episode is – do we know why we pay taxes and where that money that we pay actually goes?

Let’s find out.

A tax is money that people pay to a government so that it can do its work.

A government — any government — is supposed to perform a bunch of duties — whether it is protecting its people and providing facilities of education, civic infrastructure and a good standard of life.

For this, it needs money, and a major part of that money is raised through taxes.

The reason I’m saying ‘major part’ is because a government also raises money from other sources — like duties, fines, money that it charges for the services it provides etc.

The interesting thing is taxes are not something new. Taxes are actually an age-old concept.

How old? Well, In 2015, researchers at the McGill University in Canada uncovered an ancient Egyptian tax receipt from 98 BC. It was a receipt for a land transfer tax and the amount on it, researchers have estimated would have been equal to 1670 dollars which is more than 1 lakh Indian rupees!

Living in ancient times was also really expensive!

Anyway the point is that taxes have been around since the time of the ancient Egyptian civilization which is among the oldest civilizations of the world.

So how did the idea of taxes even start?

You will find this answer if you imagine how people earned their money back in ancient times.

In most ancient civilizations, while the common people earned their money by growing crops, producing goods, unearthing metals etc, the kings and the ruling class did not do any work and hence, needed some income to support themselves.

One way of raising this income was to tax the people who produced the resources. And since they were kings who mostly portrayed themselves as gods, they could do this.

There were taxes not just in places like Egypt, Rome and other old civilizations. Even ancient India had an elaborate taxation system.

And we have proof of this in two literary works: the Manu Smriti and the Arthashastra.

They tell us that, in ancient India, taxes were paid in different ways, depending on who you were and what your job was. Some ways to pay tax were through gold coins, cattle, grains etc.

The Arthashastra in fact, has detailed tax rates for things like water, transport, pilgrims, and foreign imports.

Throughout India’s history, some form of a taxation system was being practised — whether it was under the rule of the Mughals or the Vijayanagara empire. Each taxation system was more elaborate and layered than the other.

Okay, that was the story of the purana zamana. Why do we still pay taxes in today’s times when there are no kings?

I asked this question to Pallav Narang, a renowned chartered accountant based in Delhi.

Pallav Narang
Now in modern times, taxes are the sources of revenue for most governments. The government requires funds for day-to-day activities and to fund the various projects that it undertakes. The government is able to realise this money by levying and collecting taxes from the people who are earning money from trade and commerce. It is therefore that we still have to pay taxes even though kings are no longer in charge.

The idea of taxation has changed over time. In ancient times, one had to pay taxes for the king’s benefit, but today, people are expected to pay taxes for their own benefit.

Paying a tax today is considered a civic duty in most countries and the argument goes like this — If you pay taxes, that money is supposed to be used by the government to build and maintain roads, to build schools, health facilities etc. — basically for things that will help . . . you.

So you are paying the government to help them serve you better.

[Nirmala Sitharaman gives the Union Budget 2019 speech in the Parliament]


Nirmala Sitharaman
Mr. Speaker sir, I begin by thanking our tax payers who as responsible citizens, (applause), our tax payers, who as responsible citizens, perform their duty, by paying their taxes. It is because of their valuable contribution that our government is able to work for our collective dream of inclusive and all-round development of our nation.

That was our current finance minister, Nirmala Sitharaman thanking tax payers and acknowledging that it is the taxes that help the government run and do its work.

In democracies, it is the people who elect the government and therefore give it the power to decide how much tax should be charged.

So, if you think about it, at least in principle, it is the people who are deciding how much tax they should be paying. They are doing this by letting their elected representative make this decision.

So, a democracy is of the people, by the people, for the people and also funded by the people.

Accha, now let’s talk of the two types of tax that modern Indians are most obsessed about.

[We hear news reports about the Union Budget.]

Yes, if there is one tax that is discussed, and debated at the beginning of every year after the budget, it is income tax — the tax that is every middle-class Indian’s pain as well as source of pride.

Do you know the story of when and how we started paying this income tax – in modern India?

The first country to introduce income tax in the modern world was the United Kingdom. The man who introduced it was Prime Minister William Pitt the Younger, in his budget in December 1798 and guess what, he did this to pay for weapons and equipment for the French Revolutionary War.

It was the British who also introduced income tax in modern India.

After the 1857 War of Indian Independence, the British Government faced a major financial crisis. So, to fill up the treasury, the first Income-tax Act was introduced in February, 1860 by James Wilson, who became British-India’s first Finance Minister.

This was meant to be a temporary measure, but like many Indian laws that were created by the British, this continues till today.

But did you know that there are countries that do not charge income tax?

For example, the Bahamas imposes no income tax on its residents. Its residents pay zero tax, regardless of where they earn their income. It’s the similar case with the United Arab Emirates or Oman.

Why do some countries charge income tax while some others don’t? Why have an income tax at all? I asked Pallav Narang again.

Pallav Narang
Now the rationale behind it is you pay a small fraction of what you earn to pay for public resources.

Now on the other hand, in some resource-rich countries, these funds can come from the sale of natural resources such as oil and coal and thus these countries are able to do away with the concept of income tax in general. In other countries such as India where this is not a possibility. The government has no option but to levy income taxes and collect them from the population.

In these countries, they have other resources like coal or oil and they use that to raise money for the government’s duties instead of charging people on their income. However, they still charge other taxes like everywhere else.

For example, Bahrain was one of the first states in the Persian Gulf to discover oil on its lands. This oil discovery has allowed it to become one of the wealthiest nations in the world – and one of the few countries with no income tax.

Accha, back to India and its taxes. Income tax is an example of a direct tax, you pay. Direct because it is paid by you, directly to the Government.

But there are also indirect taxes.

Pallav Narang:
Indirect taxes are taxes on consumption. They ensure that the government earns some revenue everytime you buy or consume some goods or services. So you are in effect paying taxes to the government without actually knowing it.

So indirect tax is that money that you pay every time you consume a product or service in India. And the list of indirect taxes in India used to be a long list: taxes like value added tax (VAT), octroi, service tax, customs duty etc at the central level.

Not just these, there used to be taxes that different states charged too – things like Professional tax, Stamp duty, luxury tax, entertainment tax are examples of these. This is a reason why things like movie tickets, or alcohol costs different in different states.

Pallav: Since these taxes affect prices of goods and services, they are also used by the government to encourage or discourage the consumption of some items. For example, you can see the high taxes on cigarettes and liquor.

So, the government also has another use for indirect taxes, and that is to use it to discourage people from buying some products. Jaise ki cigarettes ya alcohol — you would have heard that they are mostly quite expensive.

Anyway, in July 2017, the Indian government replaced many of these indirect taxes with ONE tax and that was GST. If there is any tax that is most-discussed after income tax, it is GST.

[We hear news clips about the GST bill being passed in the Parliament.]

What is the GST? Pallav explains it to us:

Pallav Narang
Before GST came in, there were a large number of indirect taxes in each state. In some states, there were a larger number of taxes or taxes that did not exist in other states that each business had to deal with. Plus each state could have different rates and different rules which meant that doing business inter-state was not an easy job at all. What GST has done is it has worked to remove these barriers and has ensured that India as a country is now a single market place with common rates and rules as well as a single tax.

So like I said before India used to have a long list of indirect taxes and the rules around these taxes were also different from state to state. The idea behind GST was to create ONE indirect tax for the entire nation instead of several such taxes.

And like Modiji said, this was a tax that was being planned for nearly two decades before it was finally passed in 2017.

On paper, the objective of having one indirect tax actually seems beneficial: one indirect tax should simplify the tax structure and process, and make the taxation system more transparent because you are eliminating several layers and several possibilities of corruption and red tape.

But what happened with GST in India is that it had many procedural problems. For example, very ironically, many traders found the process of paying GST complicated; refunds on GST was delayed and a lot of small traders suffered as a result.

Aur Goods and Services tax se, GST ko kahin logon ne, kuch interesting naam diye

[We hear a news clip about GST]

GST, Gabbar Singh Tax!

In 2020, the government themselves admitted that there were large shortfalls in how much GST they managed to collect versus what they had predicted they would. The GST also replaced a lot of taxes charged by the different states, so the states aren’t very happy about losing that revenue even though the Centre has promised to compensate. Basically, we have to wait and see if this one tax, one nation idea is going to work for us.

Anyway, the question I’m sure all of us are more interested in is: Whether directly or indirectly — income tax or GST — the government collects all this tax but then what?

Where does all that money go? and how does the government actually spend it?

This information is actually something that we as citizens, can easily access because it is announced in our budget. And we do have a right to know since it is our money and it is supposed to be spent on us.

We have an entire episode about our union budget, so make sure you listen to it for details.

[We hear a news clip about the Budget.]

The taxes we pay are added to the other money the government already earns from loans, fees etc and that total amount is then spent according to the budget.

For example, in this year’s budget, the Indian government proposed to spend the majority of its revenue — 23.3% — on interest payments. This is the interest the government has to pay on all the money it has borrowed as a loan.

This is more than how much money it proposed to spend on other sectors like defence, health and education. For example, the budget allocated 3.2% for education and 2.2% for health.

Now, whether our tax money is being spent on the right things or not is of course open for debate. But the fact remains that again, taxes form a majority of the government’s revenue and without that revenue it simply cannot run.

So, whether or not you like it, taxes are necessary. And yet, why do people complain about paying taxes?

Common sense will tell us nobody really wants to give away their money for free. And we Indians anyway already complain that the government doesn’t do much for us.
One country that seems to be an exception to the case is Sweden. Swedish people say that they actually like paying taxes. Sweden, in fact, has one of the highest tax rates in the world – 57.9% compared to 33.3% in India!

But, according to an article in The Guardian, people in Sweden see paying high taxes as a benefit — they say that paying higher taxes gives them access to better facilities. They feel that they get value for their money.

Finally, before I end today’s episode, I want to talk about a common complaint that one hears in India — that only some people pay taxes and that the others are dependent on that tax money.

[We hear a news clip]

Kangana Ranaut
Hum logon ki jo population hai poora, sirf teen se chaar per cent tax dete hain.

That’s not true!

Yes, it is true that only approximately 2% of Indians pay income tax but one of the reasons for that is a majority of Indians make very little money and also, even among those who are supposed to pay, many of them manage to evade paying income tax.

Pallav Narang
In the year 2018, only 5 odd crore people in India or approximately, 3.8 percent of Indian nationals had actually filed returns. Now many of these have incomes below the exemption limit which means that they have to pay no tax at all. So you could say that only 2-3 percent of Indians actually pay any taxes. The overall rate of compliance as you can imagine is pretty bad for a country of our size. On the other hand, everybody does pay taxes in the form of indirect taxes which are a major contributor to our tax revenue.

So, what we should know is, everybody pays tax in one way or another – anybody who consumes any product or service in this country is paying a tax of some amount ultimately.

That was a quick overview to a commonly misunderstood topic – Why do I pay taxes, and what happens to all my tax money?

I know I can’t take away your grief when it comes to your taxes, but I hope I have been able to explain why we do what we do!

See you next week.

Credits

Narrated by – Dhruv Rathee
Producer – Gaurav Vaz
Research help –
Written by – Title Track Design – Abhijith Nath
Audio Production –