The Tax Cycle - Why paying taxes is in your own interest? - H&R Block| Blog

The Tax Cycle – Why paying taxes is in your own interest?

Savings & Investment Planning for Children’s Higher Education- H&R Block India
November 23, 2015
December 16, 2015
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Have you been contemplating why you need to pay income tax even though you are already contributing by paying service tax, excise duty, VAT, toll, entertainment tax and other forms whenever you buy goods, fuel, food or even use public facilities such as transport and roads?

The answers are hidden in the tax cycle – the way these taxes are utilized by the government and in effect benefit the citizens.

You must be aware of the saying, “What goes around, comes around”. The way the tax cycle works is quite similar to our water cycle. “The state collects tax for the greater welfare of its citizens in the same way as the sun evaporates water only to return it manifold in the form of rain,” said renowned Sanskrit writer Kalidas in his play Raghuvansha penned as long back as Circa 4 CE, explaining the necessity of collecting taxes through this interesting metaphor.

So, consider your taxes as a big pool of water. These are filled in by two rivers namely direct taxes and indirect taxes. Direct taxes are levied based on income levels, but indirect taxes – such as customs, service tax, excise – are charged on the sale of goods and services and wouldn’t differ based on the income level.

The taxes pooled in are used by the government to finance activities namely setting up public infrastructure such as roads, dams, railways, water supply network, electricity grids and power supply stations and transport, in addition, to set up and train staff to maintain law and order such as police machinery and army, running judiciary, administrative staff salary, pension payments for the staff and even paying off subsidies.

Let us see what would be the government’s estimated earnings during the current financial year to understand the impact.

As per the Union Budget, 2015, presented by Finance Minister Arun Jaitley an estimated Rs. 14,49,490 crores would be collected during the year 2015-16 as Tax Revenue.

But he indicated that much of this gain would come from indirect taxes.

Now if you see while income tax or direct tax is collected as a percentage of your income. However, indirect tax is collected irrespective of your level of income. So, when the government is not able to meet all the expenses and asset creations by direct tax revenues, they need to resort to the unwanted way of indirect taxes.

Why we call indirect tax as unwanted is because it takes away a higher proportion of income from the poor compared to the proportion of the income of a rich. So, your driver would have to pay the same excise duty for filling petrol in his two-wheeler that you pay to fill it in your car. But the excise duty is a small percentage of your income but forms a bigger proportion of your driver’s earnings.

When the government is not able to pay for the administrative day-to-day functioning activities and infrastructure development using direct taxes it would resort to indirect tax. When both fail to add up, the government has to either sell its assets such as public sector undertakings or borrow.

This should be simple to understand if we consider our own family budget. When you want to meet everyday expenses, you use your earnings. If you fail to meet your expenses through your salary, you will dip into your savings or assets such as home to earn rentals. But if none of the measures help, you would be forced to borrow, thus draining your earnings by way of interest too.

So, only if you are able to meet your daily needs and are left with a surplus would you be able to buy a home or a car and support the needy through donations. The same is the case with the government.

The cost of houses and repair increases due to increase in labour costs if delayed. Similarly projects if delayed due to lack of funding can lead to a steep cost of overrun – or what we call as an escalation of prices due to increase in raw material and labour over a period of time.

One can draw similarities between the household budget and the government budget. Lack of funding for projects has lead to high-cost overruns. To give you an estimate, ratings and research firm Crisil stated in its report titled, “No smooth ride” released in October 2015, “The cost overrun is expected to be approximately Rs 7,500 crore for these very high and high-risk, under-construction projects. Cost overruns will keep increasing with further delays in completion.”

So, it is quintessential that we pay our due taxes. The showers that we experience would be soothing as only these can help the government build pothole-free roads, dams, warehouses, sparkling offices, stadiums and the likes.

H&R Block India strives to blend tax expertise with a strong focus on continually improving the client experience to provide all its clients with an unparalleled value proposition for filling their income tax online.


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