Role of Tax in Resource Mobilization

  • Resource mobilization is of strategic importance for bringing about rapid economic growth. It is, therefore, necessary to achieve a higher ratio of savings to national income.
  • Taxation can be used to raise collective savings for public investment and also at the same time to promote private investment.
  • A well-conceived scheme of taxation is an important way of raising the ratio of savings to national income which is one of the crucial determinants of the rate of economic growth.
  • India has organized tax structure with clearly defined authority between Central and State Governments and local bodies.
    • Central Government levies taxes on income (except tax on agricultural income, which the State Governments can levy), customs duties, central excise and service tax.
    • Value Added Tax (VAT), stamp duty, state excise, land revenue and profession tax are imposed by the State Governments.
    • Local bodies are empowered to levy tax on properties and for utilities like water supply, drainage.
  • Direct taxes, i.e., taxes paid by households and companies to the government or other public agencies. This includes income tax, payroll tax (including mandatory social health insurance contributions) and corporate or profit tax.
  • Indirect taxes, i.e., taxes paid to the government or other public agency via a third party (retailer or supplier). The tax is based on what a household or company spends and includes value-added tax, sales tax, and excise tax on alcohol and tobacco and import duties. Now, as many of the indirect taxes have been subsumed in single tax, i.e., GST so now onwards GST becomes an important source of resource mobilization.
  • Non-tax revenues (from state-owned companies, including natural resource revenues such as oil and gas).
  • Financing from external (foreign) sources is considered ‘public’ when the funds flow through recipient governments.
  • Savings and investments are another important way of understanding the sources of resource mobilization.
  • It has been suggested that an appropriate tax, which would mobilize resources or mop up economic surplus is the progressive income tax. Income tax is imposed not only on the incomes of individuals, but also on the profits of the corporate companies.
  • Thus, there is personal income tax and corporate income tax (that is, tax on net profits earned by corporate companies).
  • In India and the other developing countries, income has been regarded as a good base for direct taxation. And the imposition of highly progressive income tax, not only mops up relatively greater amount of resources, but also tend to reduce inequalities of income.
  • However, a progressive income tax with a high marginal rates of taxes adversely affects private saving and investment and also raises the propensity to evade the tax. In view of this, two proposals have been put forward to make the income tax both as an effective instrument of resource mobilisation for the public sector and of providing incentives to save and invest.