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Taxing tangle PDF Print E-mail
Tuesday, 31 May 2011 00:00
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With three think tanks—NIPFP, NCAER and NIFM (National Institute of Financial Management)—in the race to estimate the size of India’s black economy, various figures are once again doing the rounds. There’s NIPFP’s original 21% of GDP estimate of 1985, Arun Kumar’s 35% in 1991 and Global Financial Integrity’s (GFI) 50% in 2008—as compared to this estimated annual generation of black economy, GFI estimated the total stash of illicit assets held abroad is $462 billion. It’s a bit like the estimates of the 2G scam, three or four by the CAG itself in one report and another by the CBI!

You need to be careful about the estimates, it is natural to confuse tax exemptions with tax evasion. India’s tax-to-GDP ratio hasn’t gone up as dramatically as it should have after the 1991 reforms; as compared to 15.4% in 1990-91, it was just 16% in 2009-10, after rising to 17.6% in 2007-08. That is poor, but doesn’t necessarily mean tax evasion—add the tax-exemptions of 7.2% of GDP that the budget papers give, and that’s a tax-GDP ratio of 23.2%. Many think the tax-exemption number is overestimated. If you assume a figure of half, that’s still a tax-GDP ratio of 19.6%. Keeping in mind agriculture income (16% of GDP) is not taxed, nor is the small scale sector (10% of GDP), that’s an effective tax-GDP rate of 26.5%. Once you take into account the exemptions given for various services, railways and so on, the effective tax is much higher—this would suggest the 50% black economy estimates include large parts of the tax-exempt economy as well. The average tax-GDP ratio for China is 17% and 35% for OECD—generally, the richer a country, the greater the formal sector, and the easier it is to tax it.

If you look at the individual components of taxation, corporate tax-GDP is up dramatically, from 1.7% of GDP in 2000-01 to an estimated 4% in 2011-12; excise duties are down from 3.3% to 1.8; service tax levies are just 0.9% of GDP, suggesting good potential, given that the sector accounts for 60% of GDP.

Amnesty schemes, the usual way to catch black money, are never quite the silver bullet they appear. The most successful amnesty, VDIS 1997, unearthed R33,697 crore (2.2% of that year’s GDP) of black money and gathered R9,729 crore of tax but the tax-GDP ratio fell after that year. The rise in corporate tax-GDP ratio suggests the way to tackle black money is to encourage formalisation of the economy (organised retail and radio-cabs, for instance, to replace kiranas and black-and-yellow taxicabs that don’t pay taxes) as this is how tax-GDP ratios rise—raising the tax-GDP ratio by just 0.1, from 16 right now, will fetch the R10,000 crore got from VDIS 1997, underscoring the point that raising tax-GDP ratios is a lot more critical in the fight against black money.

 

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