Where does your tax money go?

Total tax revenue as a percentage of India's GDP is 9.48% (@Rs.10.77 Lac crores). To understand where your tax money goes, it helps to first know how the government derives its income. Any amount going to the Government is called "Receipts". Two types of receipts are in place - Revenue receipts and Capital receipts. Revenue receipts include interest and dividend income from government's investments and direct and indirect taxes collected. Capital receipts include external assistance, market loans, small savings and provident funds.

Any amount going out is called Expenditure which is also of two types - Plan and Non-Plan expenditure. Plan expenditures are those that are required for the functioning of the government, buying of fixed assets like land, building, machinery & equipment and loans and advances. Non-Plan expenditure includes interest payments, debt repayment, defense, subsidies, police, pension, Loans to PSUs, state & union territories and to foreign government(s).

Expenditure breakdown
Annual budget reports show that up to 75-80% of government's expenditure goes to revenue expenditure and the rest to capital expenditure. Within the revenue expenditure, 45% is spent on interest payouts, debt repayment, defense and subsidies with just 30% left for all development activities (Rs.3.23 Lac crores). In other words, about Rs.269 (US$4.5) is what is left for the development of every Indian (population 1.2 billion). Although 50% of the nation's workforce is in agriculture, less than 3% is spent on rural development (while we still import 1/3rd of our annual consumption of fertilizers). Of the 20-25% spent as capital expenditure, not all are spent judiciously on development, wasteful spending prevails in this sector too.

Could anything be done at all?
Interest outgo, defense spending and subsidies are a huge drag on the budget. Only judicious management of these components could lead to containing the fiscal deficit (deficit & interest outgo itself being chicken & egg), there by diverting funds to sectors that need domestic innovation, growth and long term sustenance. These include agriculture, power, education, healthcare, manufacturing (small scale industries) and sustainable alternative energy.

Another long pending measure requires boosting tax collection by ensuring that the black-money leakages are plugged through proper surveillance of tax-evasion routes. One private study estimates the tax evasion amount at 20% of GDP - Rs.22.8 Lac crores, which is more than double the tax collected as of date ~ equivalent USD380 billion, which can make India self-sufficient and not rely on FDI (this leaves about Rs.19000/US$317 for the development of every Indian p.a).

India has excellent demographics and plenty of natural resources, only structural policy changes combined with efficient administration could transform India to a self-dependent economic power. To make this happen, systematic tax collection, foresighted budget allocation and prudent management of expenditure is critical.

Comments

Popular posts from this blog

Fixed or Floating rate for my home loan?

Index

Covid Impact, Part I - To Personal Finance