India is as good as a tax haven For Rich

• India has released a tax data for year 2012 which confirm apprehensions on two counts: first, India remains a low-tax country despite the acceleration of economic growth in the past decade, and second, income inequality has risen in the past two decades.
• The share of the top 1% of the population in the country in the total national income was around 10% in the 1950s, but came down to less than 4% by the end of the 1970s before steadily climbing to 7% by the end of the 1990s. By the latest estimates, this went up to 13% for 2012, the highest since independence, but also, importantly, it almost doubled in the past 15 years. The same is true for the share of the top 0.1% of the population, whose share was 5.1% in 2012, up from an average of 2.5% in the latter part of the 1990s.
• During the period when the economy expanded at a rate of more than 8% per annum, our tax-to-GDP ratio remained almost stagnant. The current tax-to-GDP ratio of around 16.8% is roughly the same as it was at the beginning of economic reforms in 1991.

Analysis:

• The primary reason for the low tax collection has been the low tax base. The Indians who pay tax account for only 2% of the population. This is not only low compared to the ratio of voters in an economy but also low compared to the quantum of high-value transactions.
• There us a dominant thinking of the governments in the past 25 years that lowering the tax rates will lead to better compliance and better tax collections. None of these have been found to be true, although it has led to a situation where the effective tax rates on corporate entities and the rich are among the lowest, while the wage-earners pay an effectively higher rate of tax, contrary to the principle of progressive taxation.
• Government has not only allowed the super-rich to amass massive wealth but also has contributed to a worsening fiscal situation by increasing exemptions, subsidizing the wealthy and through various tax giveaways. Not only is India the country with the lowest tax-to-GDP ratio among countries with a similar per capita income on a purchasing power parity basis, but is also the country with the lowest expenditure-to-GDP ratio.
• Clearly, the subsidies to the rich are not only bad on the equity principle, but are also hurting the capacity of the government to spend more on essential sectors such as health and nutrition and education. Not only has our expenditure on a per capita basis on these sectors been among the lowest, it has also remained stagnant for the past two decades.
• Also there is increase in inequality which is highest since independence and is much more than in any other country with a comparable per capita income or among developed economies. This also shows the inability of the state to tax the rich more.
• As recommended by the Economic Survey, bringing more people into the tax net through some form of direct taxation will help. In some instances, higher tax rates can also be considered by the government. Experiences of developed countries can be considered here. Most of post-war Europe and other developed countries had an effective tax rate higher than 60% during the time their economies were being built after the war. On the other hand, India continued to lower tax rates not just on personal income but also on corporate entities, with the finance minister recently announcing a reduction in the corporate tax rates to 25% from the existing 30% by 2019.
• The approach of the government in the past few years regarding tax collection has not been very impressive. Overall, this has largely affected the poor in the country. Hence, it is high time for the government to take up the matter seriously and address the issues concerned.

By: Vishal