Understanding the government...Part 6 (Taxes and duties)

“Ha-ha! Ok Raju! You know learnt the expenditure side of the Budget; but, if you want to ask smart question to the Finance commissioner, you should know the income (revenue) side too! That is about the taxes, duties etc”

 “Yes aunty, I know that! The ‘direct tax’ is imposed by the government on the individuals and companies on their income, and the ‘indirect tax’ levied on the products/commodities sold in the market!”

“Very good Raju! You are right! We get our revenue from taxes and duties, like excise duty, customs duty etc.”

“Waittt aunty!! Where did these excise and customs come from? Why so many different types? Can’t we have just 2 categories? Direct tax, and indirect tax?”

“Yes, it could have been simple as that. But the system of revenue collection evolved as per the need. When the expenditure of the government increased, say, due to war etc, then the government used to explore ways to get more revenue thus introducing a new type of tax! Thus, taxation grew from simple to complex over a period of time.  

To start with, ‘customs duty’ was the earliest income to the king! When the traders used to travel and sell their produce in different kingdoms, they used to meet the King and seek his permission and support in selling their ware in his/her kingdom. Needless to say, they used to give a small part of their ware to the king as goodwill.

Later this goodwill almost become a custom, a norm, and soon become a compulsion, or a duty!  Kings issued order on how much to collect and how to collect as ‘custom duty’! ‘Customs officials’ were appointed to collect it at the entry points of the kingdom!

Thus, when the goods or commodity comes from outside the kingdom/country, then this ‘customs duty’ is imposed on the goods at the entry point itself! That’s how you will find ‘customs’ offices at all the entry point of the state, like the ports, airports, road borders!”

“Interesting Aunty! I understand the ‘customs duty’ now! Next is about the excise duty. What is it? Is it some additional customs duty?”

“No Raju, it is not in addition to Custom duty! But, it is the local version of Customs! Meaning, that, it is the duty imposed on the goods manufactured inside the country!”

“But, then Aunty, are we not levying sales tax on them when they are sold?”

“You are right Raju; we are indeed levying sales tax on most of the goods sold. But, in addition to that, we also impose a levy on some of the goods, as and when they are manufactured! This is call ‘excise levy’. The government ‘excises’ it’s right to collect a portion of what is manufactured within the country too!

And interestingly, while the ‘sales tax’ is a percentage of the cost of the good or commodity, the ‘excise duty’ is not on the value, but, it is on the total quantity manufactured!

For example, if a packet of 100 gm coffee powder is sold at Rs.100; the sales tax may be 10% of it, that is, Rs. 10. Whereas, the ‘excise duty’ will be collected at the rate of Rs. 3 for every 100 gm of coffee manufactured! So, the excise duty is normally based on quantity and not on its cost!”

“Interesting Aunty! Smart way of collected revenue! It will also mean that government gets ‘excise duty’, irrespective of whether it’s sold or not! Aunty, is there any connection between ‘excise’ and ‘alcohol’? Why these two words, ‘excise’ and ‘alcohol’ are always associated?!”

“Oh that! That is because, the alcohol industry, what is called as ‘liquor’ colloquially, is one of the major commodity that pays ‘excise duty’, to the extent that the government keeps a officer posted to each distillery to collect the ‘excise duty’! That’s how excise is closely associated with liquor business!”

“Ok aunty! I get it! So, it means, all the commodities either manufactured inside or imported from outside are under either under excise or customs net?”

“Yes. Almost! But, there are some exceptions. Items, which are consumed by the common man, like vegetables, fruits etc are not taxed in any manner. And in the direct tax, farmers are no more taxed! It’s only on individuals who have high income and companies that make profit!”

“Got it aunty! And, if the government wants more revenue, it can tweak the rates and thus get a higher share? Or it can bring more commodities under excise or customs?”

 “Wow! Now you have started talking like a real king!”

“Don’t make fun of me Aunty! I am just learning! I also guess that if more taxes are there, it will make people unhappy. Isn't?”

“Yes, my dear! People will get unhappy when the taxes are increased, as they have to pay more. And if the taxes are very high, people will start buying less, or at times, start cheating the on the tax, by trading secretly!”

“Oh, I understand! It’s like the shopkeeper selling without bills! That sale will not be reflected in his accounts, and thus he need not pay tax for that part to the government?”

“You are 100% right Raju! Many do that! But, it does not start and stop with the shopkeeper! Even the manufacturer has to agree to sell it to the shopkeeper without bills! You get me?  The whole cycle of manufacturing and selling has to happen secretly, without accounts!”

“Oh, yes, I get it! And the same can be done with ‘customs’ too! That’s how he had smugglers smuggling the goods into the country evading the ‘customs duty’! Thus they are able to sell it at a cheaper rate and make huge profit!”

“Yes, remember, the dons you see in Hindi movies?!”

“Lol! Yes, aunty! How can we forget them?! So, if taxes are exorbitant, then it leads to non-compliance and associated smugglers and dons?!

And that, taxes and duties have to be balanced to ensure that they are complied by the public willingly!”

“Yes my dear! Then you will be a good king!”

“Oh thanks Aunty! Let me be an average king, then I will think of becoming a good king!

I am now quite confident! Shall I call the finance commissioner? You think I can decide on the ‘remission’ I have to make in the ‘revenue’? If at all I agree for that, how much I can reduce Aunty? And to counter that loss, do I increase some tax or I reduce my government expenditure?”

“You are growing intelligent Raju! You first check what are the expenditures planned and details of tax you have imposed on the public. Then we can decide it. Also, your finance commissioner will give you some good suggestions!”

Raju winked at Aunty! “Are you sure that he will give me a good advice?!”

Aunty laughed! “Haha, let’s check your luck! Call him in now, I will sit quietly and observe you both”

(to be continued)

Some useful links:

http://newint.org/features/2008/10/01/tax-history/

http://www.econlib.org/library/YPDBooks/Lalor/llCy341.html