Expenditure tax is a tax that is charged to every individual according to his or her expenditure, in contrast to a charge based on the income of the particular person. The idea of an expenditure tax blames as much on such reasoning that individuals who spend more money are believed to enjoy a higher standard of living and, therefore, should make more significant contributions to government revenues. This is different, however, from income tax which is imposed on the income of people who receive such an income. While expenditure tax has not been used in India, it has been reviewed on a number of occasions, and there have been suggestions to adopt this form of taxation. This writing will present an exposition of expenditure tax in India and detail its evolution into its repeal and discussion of the modern Indo-consumption tax such as the GST.
What is Expenditure Tax?
Expenditure tax is a direct tax charged with the amount of money spent by a person and not the amount earned. This theory of the tax is the rationale that spending power, or the extent of one’s capacity to spend particularly frivolously, is a measure of economic status. Therefore, a consumerist society that uses more luxury products and non-susceptible services is deemed to be a potential revenue earner for the government.
Such tax is considered as a means of raising revenue from individuals that may not be completely honest in their declarations or those earning income in the informal sector (the unorganized sector comprised of cash basis business). The expenditure tax would be applied to consumption, particularly the consumption of luxury goods including but not limited to fancy automobiles, fancy wristwatches, and luxury voyages.
The Expenditure Tax Act of 1987
This Indian policy is called the Expenditure Tax Act of 1987 and was India’s effort to tax people based on their luxurious spending. This law was passed in light of the emerging problem of inequality and tax evasion, and it saw high-end income earners using their ill-gotten wealth to buy luxury gadgets without paying their due taxes.
Scope and Coverage of the Act
Under the Expenditure Tax Act, the government aimed to tax the amount that a person had at his disposal or otherwise, which is referred to as the extra spur and the fancy. Some of the key areas of expenditure that were taxed under this Act included:
- Customer products, such as luxury automobiles, luxury boats, and private jets.
- Full-service hotels and resorts are establishments where guests incur a lot of expenses on their room bookings.
- Boots, belts, wallets, expensive watches, jewellery, branded clothes, branded shoes and bags etc.
Tax Rates and Exemptions
The tax rate that emerged under the Expenditure Tax Act was 15 % of the luxurious expenditure incurred by an individual or HUF. This was a pretty good rate to achieve, to capture people who were using products and services that were not fundamental in their lives. But, there were some exceptions in this case under the Act. For instance, purchases that were made for business purposes, such as travelling expenses or purchasing expenses that had been made during meetings and other related activities, were excluded.
The Scope of Taxable Expenditures
These initial items subjected to tax under the Expenditure Tax Act included luxury items and services. However, there was a challenge with the scope of the Act. It targeted only particular detailed consumption as opposed to different forms of consumption, hence affecting only the highest class of consumers who did not indulge in luxury and were likely to evade this tax.
This over-simplification resulted in really the Act not being very appropriate to deal with most aspects of the matter of distribution of wealth and income. Lastly, the wealthy will have options through which they can avoid paying the tax, for example by inflating or underreporting their luxury consumption of good and services a situation whereby some entities would pay through cash would also help them avoid the tax.
Challenges in Implementation
When initially designed, the Expenditure Tax Act aimed at taxing the luxurious expenditure of the rich and the well to do but was filled with serious implementation pitfalls. Some of the key issues with the Act included:
Challenges in Monitoring of Consumption
This is one of the main problems with an expenditure tax: people’s consumption is not easily monitored and counted. While income tax is already recorded, and the tax return is declared to the personalized authority, consumption is much more difficult to quantify. The infamous cash payment and use of third parties to negotiate for goods and services or taking up positions in assets that are not considered in the expenditure analysis are well known examples to the rich.
High Administrative Costs
The Expenditure Tax Act called for much administrative work in its implementation. Tax authorities had to track the consumption of luxury goods, exercise surveillance, carry out assessments, and verify compliance. This increased bureaucratic expenses and improved firmness between tax authorities and firms selling luxury products.
Limited Scope and Impact
While the tax was intended to curb excessive consumption, saved receipts prove that the measure did not possess the necessary vector to curb improper income declaration or, conversely, address concerns related to wealth. The Act was mainly directed at the ill-gotten luxuries and necessities of life and lifestyles, and there was little or no imposition of tax on other forms of wealth, such as properties and financial securities.
Consequently, the tax could not generate considerable revenues and did not act as planned in relation to the distribution of wealth. Since luxuries were privately consumed and most high-income earners did not consume luxury goods, they did not pay the tax.
The Expenditure Tax Act was repealed in the year 1996.
However, because of problems with its efficiency and enforcement, the Expenditure Tax Act was effectively repealed in 1996. Since it was poorly administered and collected little revenue, the government discovered that the tax had restricted applicability and was cumbersome.
The repeal of the Act was also timely because it was too burdensome for businesses in the luxury industry, which has already been struggling with compliance issues. In addition, the tax did not comprehensively resolve the problem of people having additional sources of income and declaring them to the tax authority or declaring large amounts of income in the black market or informal economy.
Expenditure-Based Taxes: GST as a Modern Equivalent
Even though the Expenditure Tax Act existed only for a few years, its goals of taxing consumption were realized through Goods and Services Tax or, GST, in 2017. GST is additional revenue collected on the sale of services as well as most products at a specific percentage depending on the category of the product.
Another is that GST is an indirect consumption tax which applies once or several times during the process of production and distribution. Some define a split tax system as an expenditure tax, but the implementation of such a system is broader than the expenditure tax.
GST and Luxury Goods
According to GST, expensive cars, branded watches, and plush buildings are levied high, which has been suggested by the Act of Expenditure Tax will do. For example, cars categorized as luxury cars attract 28% GST further subjected to cess, which ranges between 15%, making it be charged at one of the highest tax rates in the system.
Similarly, other products, which falls in the luxurious category, including branded clothes and quality accessories, pull higher GST rates. This makes sure that the people with high incomes who are using luxury products should be the ones to contribute much to the public revenue. Although, unlike the Expenditure Tax Act, which sought to tax specific goods and services, GST extends the list of taxable goods and services and, therefore, is more effective.
Broader Consumption Tax
GST has made India’s tax structure more manageable by unifying many taxes, such as VAT and excise duties, at a single platform. It has also favoured compliance because instead of several taxes to be collected depending on the region or sector, there is just one tax. Also, because it is charged at every successive step of the chain of supply, tax evasion cannot take root since taxes are jointly collected at several points in the supply line.
Strengthen the enforcement of taxes on luxury goods and services to ensure fairness in wealth distribution and address the needs of businesses and consumers.
Conclusion
The Expenditure Tax, as introduced in India, was a vast but temporary tax meant to help curb unnecessary spending and hence bring equality in ascertaining the general wealth. While it was later withdrawn, the tax was important in demonstrating the government’s attempts to tax unproductive spending. Understanding its introduction and later repeal offers a wealth of knowledge about the field of fiscal policy and the various issues relating to the placement of taxes, particularly those tied to the consumer end of the equation. They have an impact on India’s other tax policies up to the present day.
