LOW TAX-TO-GDP RATIO OF INDIA
For any economy, taxation is the key to long run socio-economic development. For India too, taxation is the chief tool of equitable redistribution of resources among the people and achieve the constitutional goal of social justice.
But sadly India has lowest tax-to-GDP ratio among countries with similar per-capita income on a purchasing power parity basis. Our tax-to-GDP ratio of 16.6% is well below the average for similar emerging economies (21%) and that of OECD countries (34%).
Due to this low tax-to-GDP ratio, the Indian economy often faces fiscal constraints and is not able to achieve the desired objectives of equitable distribution of wealth and justice.
· Narrow tax base- Only 4% of Indians in voting age file annual tax returns and only half of them pay any taxes. Ideally 23% of voting age Indians should pay taxes. Due to this narrow tax base the honest tax payer is unduly burdened and overall tax collection remains low.
As per Shome panel, in last 10 years, the direct tax burden has increased by more than 700% while the number of tax payers has grown by only 35%.
· Structural factors- Structural factors also contribute to low tax-to-GDP ratio of the Indian economy. Majority of our economy being in the informal sector is out of purview of formal taxation system. Moreover, a vast majority of our labour force earns too low a income to pay any taxes.
· Issues in tax administration- As various experts and commissions have highlighted, Indian tax administration structure is very complex. Presence of multiple taxation rates, exemptions, avoidance provisions, exemptions etc. make tax administration a tough task leading to poor tax collection.
The presence of vast number of cash based transactions and corruption in tax administration promotes tax evasion and poor compliance.
· Tax exemptions and tax expenditure- As per economic survey, the tax expenditure or tax revenue foregone in the year 2015-16 was to the tune of Rs. 600000 crore. The exemptions towards the taxable income have grown at a faster rate than the income itself and as a result tax expenditure is on a rise.
· DTAAs- The loopholes in DTAAs or double tax avoidance agreements have been utilised by companies and individuals for round-tripping, double non-taxation etc. and have effectively led to evasion of taxes.
· High rates of taxation- Even though in the post liberalisation era, the tax rates have been significantly lowered, in some cases the high rates of taxation persist and are a reason behind tax evasion. For example, the stamp duty charges on land registration are very high leading to tax evasion.
· Implementation of GST could be a potential game-changer as it will improve indirect taxes collection efficiency by phasing out a series of exemptions and improving compliance by lowering tax rates. So much so that GST implementation is likely to boost tax revenue by 1.5% of the GDP.
· Rationalising tax exemptions and tax expenditure will also boost tax revenue. While it is essential to provide certain tax exemptions in order to boost investments in the economy, they need to be rationalised so that tax revenue foregone is not too high and the tax structure remains fiscally viable.
· Revisiting DTAAs with countries like Mauritius, Cayman Islands, Bahamas etc. is also a step in th right direction as it will stop evasion of capital gains taxes and will prevent what has been termed as 'Base erosion and Profit shifting'.
· Revamping tax administration by simplifying the tax laws, digitising the taxation process, rationalising tax rates (especially for property related taxation) and creating specialised 'Tax Policy council' and 'Tax research unit' as suggested by Shome Panel will also improve tax collection.
· Finally, the suggestions by Tax Administration Reforms Commission must be implemented. These include avoiding retrospective taxation, separate dispute redressal mechanism for tax related issues etc.
By adopting these solutions, India could reform its tax administration, compliance and collection and achieve the desired aims of taxation acting as an effective tool of redistribution and social justice.