Burden of taxation impeding household consumption, says Ind Ra

The burden of taxation, particularly indirect taxes, on households has worsened lately and is preventing them from spending more on consumption, a domestic rating agency said on Tuesday.

Unlike the corporates who are enjoying a rationalisation in income tax, no such move has been introduced for the households who continue paying elevated taxes, it said.

Burden on households tax could delay consumption recovery, India Ratings and Research warned, stating that the increase in indirect taxes through the excise duty hike in fuels just before the pandemic and the second wave of infections have had an impact.

The share of total tax burden on households has risen to 75 per cent from 60 per cent in FY10, it said, explaining that this was largely due to the combination of a higher excise duty on fuel and a reduction in corporate tax.

It said corporation tax has been rationalised to augment job creation and attracting direct foreign investments, and also backed the move calling it a legitimate change because it made our exports uncompetitive.

"The burden of taxes, particularly of indirect taxes, on households has worsened lately, it said, adding that the excise hike has led to retail prices of petrol and diesel hitting record levels and impacting household budgets both directly and indirectly.

Indirect taxes are not progressive by nature and lead to a disproportionately higher welfare loss to households that are at the lower end of the pyramid, it said, stressing that unlike the corporates who benefitted through tax rationalization, no such measure has been given to the end-consumers.

Consumption had been going down before the COVID hit us as well, it said, adding that the job or salary losses, coupled with increased expenditure for COVID illness came as a double whammy for households during the pandemic.

"The challenge, therefore, is emerging on the demand side. It firstly manifested in FY20 when the private final consumption expenditure growth declined to 5.5 per cent from an average 7.5 per cent during FY16-FY19. Thereafter, the two successive years of a massive economic shock have eroded the households' disposable income, which was already under pressure reflected in low per capita income, the agency said.

It analysed salary or wage growth in 2,000 non-financial corporates, which revealed that 60 per cent of the corporates had reduced their employee costs in FY21 and the loss is unlikely to be recouped.

The risk of declining real wage growth could limit the consumption and demand improvement both in the near and medium terms, it warned.

Meanwhile, the agency also said that the second wave is likely to impact rural loan collections in securitised pools of loans.

"The agency believes the second wave and its demand disruption will continue to impact borrowers at the bottom of the pyramid and transactions will witness moderately more delinquencies from rural geographies in FY22 than in FY21," it said.

The resurgence of the pandemic in April-May 2021 and the consequent containment measures affected collections in securitisation transactions across asset segments and across geographies, it said, adding that in transactions it rates, the collections reduced to 73 per cent in April from 84 per cent of March.