Skill Census

Relationship between Taxes and Skills

Tax collection in India

Only 1.6% Indians pay taxes?

Correction! only 1.6% Indians pay income tax. Rest all contribute through indirect taxes.

There is a misconception that only a very small percentage of Indians pay tax. The reality is, everyone pays tax to the government. How? Let us understand.

There are two types of taxes – direct taxes and indirect taxes. Capital gains, income tax, gift tax etc are direct taxes. Direct taxes are levied on a person’s earnings. Hence, people who are eligible would-be paying taxes. The responsibility of paying the tax remains on the earning party.

Indirect taxes are like value added tax (VAT), goods and service tax (GST), service tax, custom duty etc. They are levied on expenses. Indirect taxes are collected majorly by the corporates and businesses providing services and products. Thus, the responsibility to deposit indirect taxes lies with these entities.

Corporates and business houses when pay taxes on their goods or services, they are passed on to the end users. Hence the end user ends up paying the indirect tax. They do not depend on consumers earning.? For example, Parle biscuits are taxed at the rate of 18% GST. Hence, even a beggar when buys a packet of biscuit pays GST.

Now, government collects almost 50% from direct taxes Direct taxes does not include only income tax, it also includes corporate tax. This hugely contributes to direct tax collection. Corporate tax is the largest contributor to tax collection.

Any form of tax will be ultimately transferred to the consumer or the citizens of the country. The taxes have to be in proportion to the income. You cannot increase indirect taxes because it will lead to additional burden on everyone, causes price rise and inflation. The tax collection ultimately depends on the ability of a citizen to pay taxes.

For example, we talk about the high taxes collected by governments of western world but we forget that their GNI per capita is much higher than an Indian. Average income of a British nation is 21 times more than an average Indian.

Having understood different types of taxes, lets understand why the contribution of income tax is so small in India.

Collection of low Income Tax?

The World Bank classifies country as per their income level into four categories, High income (USA, USSR, Saudi Arabia, UAE, Oman, South Korea), Upper middle income (China), Lower middle income (India) and Low income (North Korea). How does World Bank classify these countries? This is done on the basis of Gross National Income per capita (GNI per capita) using Atlas method. As per Atlas method, India’s GNI per capita is Rs.2,10,000/- per annum. If you compare GNI per capita of China who is in Upper middle income is Rs.11,25,000/- per annum (when converted into Indian rupees) which is six times more than India.

Income tax slab in India starts with Rs.3,00,00 per annum as per the new tax regime. Naturally average Indian will not be eligible for income tax. Indians who earn just better get away with investments and rebates. Those rebates are necessary because cost of living is much higher. The result is, due to disparity of income, most of the income tax collection come from rich. ?

Till 1980s China, India and Pakistan were at par in terms of GNI per capita. In last 30 years, China progressed leaps and bounds whereas we in comparison, did not grow at the same pace. Pakistan whereas stands at Rs.1,50,00 GNI per capita. Pakistan is behind us but the gap between us and China is really huge. China will soon be joining USA and USSR in high income country.

In other words, we did not utilize our potential completely. India will have to put an exceptional show in increasing their income One of the major drawbacks in increasing their income are skills. More than caste census we require skill census and see how we can help people of India acquire skills or help them develop the skills.

Skill Census?

If I share my experience, when I was part of L&D team with a chemical company, during interviews I found that fresh engineers that came out of college with an engineering degree (especially from rural India) did not even have basic understanding (my experience). They learnt most of the work on job. I have even worked with graduates from agriculture college knew little about their subject. Those degrees are a piece of paper for namesake literally. Even today, when I conduct the sessions, focus is more on the certificate than the learning they get. Focus should be on becoming an expert rather than collecting the degrees and the certificates.

Focusing on improving the skills of the new generation, making them more capable, improving their standards of teaching are the key to employment, higher salaries, higher GNI and a progressive nation. Building entrepreneur mindset, initiatives in supporting them build their business needs to be focused.

Reducing the disparity of income and improving the quality of life of an average Indian is essential. Though we have become third largest economy in GDP, our GNI per capita is still very low. We can become a super power and even become number one in GPD overtaking USA but without improving the average income, income of a common man, we would be still a country of poor and few royals.

Skill census, providing an ecosystem or education system that helps learners and people acquire, improve and grow their skills, providing them the job opportunities, helping them earn and lead a better life should be the focus or else we will be a young country with no skills and no work.

Skill building will give opportunities to Indian youth to make money, improve their standard of living and thus generate more taxes that leads to overall growth of the nation.

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