The finance ministry has yet to accept the National Institute of Financial Management’s (NIFM) estimates of the size of the black economy—this shows the proportion has halved from around 30% in the early 1970s—and many will find it difficult to believe this in the context of scams that have been regularly surfacing in recent years such as the 2G one. It is important, however, to put in perspective the study that FE has started a series on from today. For one, even if you were to believe the larger R1.76 lakh crore loss figures, it is no one’s case this amount was taken out in cash by industry and given to bureaucrats/politicians—only the money that changed hands illegally can possibly figure in the black money estimate. The other macro number that has to be kept in mind is the sharp increase in tax-to-GDP ratios in the country—if more taxes are being paid, by definition, the proportion of the black economy is coming down. While India had a tax-to-GDP ratio of 15.7% in FY92, this rose to 17.7% in FY08. This has fallen in recent years, but much of this has to do with a collapsing economy—if the topline of companies is not growing, how does the government get excise duty; and if the bottomline isn’t either, where’s the corporate tax to come from? Once the economy recovers, so will the tax-to-GDP ratio. Indeed, if you take into account the fact that a third of India must be poor based on a reasonable poverty line—not
the Tendulkar one—the effective tax-to-GDP ratio is actually a lot higher.
Similarly, once under-recoveries on petroleum products are removed, oil PSUs will start earning R70,000-80,000 crore or so more, this will mean R20,000 crore more of taxes or an increase in tax-to-GDP ratio of a high 0.2 percentage points. Indeed, sensible policies will help everywhere. Raising kerosene prices to market levels will reduce the incentive to adulterate, for instance, and will bring in large swathes of the parallel economy back into the official one. Reducing stamp duties has had a salutary effect on house registrations and raising circle rates will have the same impact. Not accepting service tax returns unless vendors used (like the courier company) also have PAN cards, for instance, is a great way to enforce tax discipline down the line.
None of this is to deny tax evasion. If India has just 14.6 lakh persons declaring a taxable income of more than R10 lakh considering that 16 lakh persons made credit card payments of more than R2 lakh in FY13 and that 52.4 lakh persons spent more than R2 lakh buying mutual funds in FY13, it is obvious the evasion is large. But even if the finance minister managed the very herculean task of doubling personal income tax collections from everyone, and not just the rich on whom the budget raised tax levels, this would get only R93,000 crore or 1% of GDP—implementing GST, however, would get a lot more. The plethora of tax giveaways, similarly, not just robs from tax collections, it makes policing the system more difficult since it’s never clear if that unit not paying taxes is doing so under some scheme. Introduction of the Direct Tax Code, once it does come in, will help plug this. In even the medium term, the only thing that works is systemic
reform, cleaning up of laws that encourage the black economy.