COVID-19 ripple effect: More taxes, less income

As India walks on the exit route from coronavirus lockdown, taxes have started soaring. With the second duty hike - two of the steepest hikes -- on petrol and diesel during coronavirus lockdown, India now has the highest taxation on the fuels. It followed increase in taxes on liquor by some states.
The first two phases of nationwide coronavirus lockdown caused an acute liquidity shortage in India's economy. Revenue collection for both state and central governments became negligible. This is why states were clamouring for relaxing liquor sale norms. Liquor is an important source of earning for both the states and the Centre.
It is estimated that the central government earns Rs 2.48 lakh crore from excise duty on liquor annually. Income of states vary but for all of them liquor is among the top earners. So is petroleum. Tax increase on these two was being anticipated as the governments were running out of cash.
The Centre was reporting less than expected collection of revenue through 2019 as the economy was on a downward spiral. Its GST as well as direct tax collections were falling short of targets. GST collection has suffered further due to coronavirus lockdown.
Businesses found it difficult to file returns. They have got an extension now while the government has deferred the release of GST collection figures for April. But it is expected that April collection would be much lower than March's earning of Rs 97.6 thousand crore, falling short of the minimum target of Rs 1 lakh crore.
This explains why the states rushed to increase tax on alcohol as soon as they got the permission to allow liquor sale. Andhra Pradesh announced hike in liquor prices by 25 per cent and 50 per cent on two successive days this week.
Delhi imposed a special Corona Fee on liquor after seeing uncontrollable crowding outside liquor shop on May 4. This raises the liquor prices by 70 per cent.
Other states have either followed the suit or considering a similar move. Some like Haryana, Tamil Nadu and Nagaland have also imposed an additional Covid-19 cess on petroleum fuels.
Reports suggest that states are mulling other options to increase their revenue collection. Options on the table include raising entertainment tax, municipal taxes, panchayat cess, vehicle registration fee and property tax.
These taxes are to be paid by common people, individual earners. And, this is happening at a time when the businesses are finding it difficult to maintain the same employment level as pre-coronavirus period.
According to the Centre for Monitoring Indian Economy (CMIE), unemployment rate in India has soared further to 27.11 per cent for the week ending May 3.
It was under 7 per cent in mid-March when coronavirus outbreak was yet to make a serious impact on Indian economy. The official data of unemployment was last released by the government in May 2019. Unemployment rate was then estimated at 6.1 per cent for June 2018.
This figure is set to change further with the flight of migrant workers from business hubs - many of which are also the Covid-19 red zones - to states with poorer record of unemployment.

Flight of workforce is likely to delay economic recovery. Manufacturing and services sectors are likely to take more time in returning to their previous output potential.
The flight of workers also means more individuals will have fewer opportunities to earn. This is likely to put additional burden on already strained social welfare schemes of the central and state governments.
Clearly, Covid-19 is having ripple effects in ways that are more intricate and complicated than its challenge to the health infrastructure and government machinery in containing the pandemic in India.

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