Data released by the Comptroller and Auditor General of Accounts show that net direct tax collections grew by about 70% to touch Rs 6.4 lakh crore till October this year, better than the pre-pandemic level of 2019-20. But nearly two-thirds of the revenues come from indirect taxes that are regressive, underscoring the need to raise the share of direct taxes in total tax revenues. The way GST is structured, it is a tax on the value added by an enterprise. Tax paid divided by the rate of tax yields the value added. This value added necessarily breaks down into two components: gross profits and employee compensation. Gross profits are very different from taxable profits, of course. But once you have a fix on gross profits, there is only so much that can be done to reduce taxable profits.
Similarly, transparency as to employee compensation leads to better taxation of employee incomes. The more complete the GST chain, the better eventual realisations of both direct and indirect taxes.
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