Taxman is oppressive, yet tax-to-GDP ratio lags
Any discussion on India’s tax system is invariably accompanied by an eventual talk of tax terrorism. TheBJP made this an election campaign to endear itself to the investor community; it is a different matter that, after talking of resolving legacy tax issues through courts/arbitration, the BJP itself got embroiled in the MAT on FPI controversy—which is why CBDT chief Anita Kapur said that, were the Justice AP Shah committee to recommend not levying the tax, the government would go by it. Yet despite the talk of tax terrorism, and this is the frightening part, India’s tax-to-GDP ratio has been stagnating—from a peak of 17.6% in FY08, it fell to 15.1% in FY10 and recovered marginally to 16.8% in FY14. And this is after the introduction of sweeping tax reforms in the early 1990s, introduction of VAT as well as widening the service tax base—at R1.68 lakh crore in FY15, service taxes alone account for 1.32% of the GDP. This number is, naturally, much lower than the OECD average, but is also much lower than that of countries like China which, after being at India’s level less than a decade ago, is today several percentage points higher. Part of this is related to the growth cycle—taxes peaked in FY08 which was a high-growth year and once growth gets back, it is safe to assume a higher tax-to-GDP number. Removing the large excise duty exemptions given to stimulate automobile demand and to keep petroleum prices down, for instance, is what led to the surge in April and May taxes.
There is a deeper structural issue as well. Enough studies have shown the presence of a ‘missing middle’ in India’s income tax collections. That is, while tax compliance levels are all right at the lower and top end of the income tax brackets, it reduces at the middle-income level. Tax data suggests that, in FY12, those earning between R10-20 lakh a year were paying just 8.6% of their incomes as tax, a number way below the number-plate tax. Also, based on estimates of India’s income distribution curve, a lot less in the middle-income category pay taxes as compared to, say, the rich. Much of this has to do with the fact that India’s top tax of 30% kicks in at the income level of just R10 lakh per annum—if the tax slabs were different, chances are more people would pay their taxes. Much the same happens in the case of corporate taxes, a fact that finance minister Arun Jaitley acknowledged in his last budget when he said he would clean up exemptions while bringing corporate taxes to levels comparable with those in other countries. India’s total tax giveaways add up to 4.65% of the GDP in FY15—the numbers have to be taken with more than a pinch of salt, but the short point is that it is possible to clean up exemptions and use this to lower the nominal tax rate which will also drive compliance. Also, as the TARC has pointed out, India does not efficiently use the reams of data it gets on spending from the Annual Information Returns in various areas like purchase of jewellery, foreign travel and hotel bills—were this to be done, a lot more of the black economy could be brought into the tax net; a new PAN-based database, to be launched next year, promises to do just this. Similarly, at just 3.5 crore, TARC estimates, India has too few individual taxpayers—TARC estimates India should have at least 6 crore of them. While chasing big targets like Cairn and Vodafone looks appealing, the taxman would do well to start cleaning up the plumbing.