As we approach yet another Budget, the debate on Indias abysmally low tax-to-GDP ratio gathers momentum. Though in the recent years, we have made considerable progress, Indias tax to- GDP ratio hovers around 10-11 per cent.
This is considerably low in comparison to OECD member countries and majority of the non-OECD Asian countries, whose economic growth is comparable to that of Indias.
Tax-to-GDP ratio is a significant indicator of the parity between a countrys economic prosperity in terms of income and expenditure. A low value for India despite record tax collection mars the euphoria stupendous growth as it would prevent sustained fiscal adjustment, leading to economic imbalance.
Among the OECD countries, Sweden has the highest tax-to-GDP ratio of 50.7 per cent and interestingly for personal income tax, it is 15.8 percent compared with Indias 1.6 percent.
USA has a 25.4 per cent whereas Mexico, amongst the lowest OECD countries, has 18.5 per cent. In Asia, Thailand has 14.4 per cent whereas The Philippines has attained a level of 13.3 per cent.
In the developing nations, different approaches have been followed to reach higher levels, but certain common features include simplification of the tax structure and easing compliance.
Countries with higher ratio have a large share of non-agriculture GDP. Concentrated efforts to tax untapped potential of direct taxes through improvement in administration has enhanced the process in most countries.
Indias low tax-to-GDP ratio has not been ignored by policymakers. Most task forces have recognised it as a central feature of Indias fiscal problem. However, so far, tax reforms has done little to cure this anomaly.
A cursory glance at the tax reforms highlights a dichotomy. While on the one hand, efforts are concentrated in widening the tax base, prevalence of tax incentives is acting as a major obstacle. Most incentives have hardly achieved the desired economic objectives of growth and employment (barring a few such as IT/ITeS and telecom) and over the years have eroded Indias tax base.
Another reason for the low ratio is historical inadequacy of taxation of services in India. Though the government seems obsessed in the recent past about widening the ambit of service tax net, we seem to be far from having a comprehensive legislation to tax services. The current legislative framework is likely to result in protracted litigation.
Tax administration is an area where there is considerable scope of improvement. Though administrative efforts to prevent leakages through AIR are laudable, honest taxpayers are grappling with stringent requirements. Citizens still need to experience the outcome of information technology to track tax evaders/ violators, thereby ensuring compliance cost is minimised for honest taxpayers.
Any tax reform process needs to achieve manifold objectives. It should ensure reduction of revenue deficit, and fulfill the objective of easing tax compliance. Several countries have ensured that the dual objectives are fulfilled through a smooth transition. Compliance burden requires to be eased by making taxpayers feel important and wanted.
An emerging trend in revenue tax administration practice has been an increasing recognition that taxpayers have rights and obligations.
Several countries (notably Netherlands and Russia), have codified such rights and obligations in their tax laws, while others (e.g. Australia, Ireland, New Zealand, Singapore, and South Africa) have elaborate articulation of taxpayer services charters.
A number of countries evolved their systems for administration of income taxes based on self-assessment principles, as opposed to administrative assessment. This reflects an abandonment of administrative procedures in favour of a more targeted verification approach (e.g. risk-based desk and field audits, computerised matching of income reports) to verify the information in tax returns.
Countries applying self-assessment systems have largely automated the process such that only minority of returns are identified for technical scrutiny. In India, though e-filing of returns has been introduced, we are far from global standards of utilising information technology in cost-efficient manner.
Globally, revenue authorities that have achieved a relatively high take-up of electronic services typically have a multi-faceted strategy to promote usage by taxpayers.
Information campaigns are an essential component of revenue strategies. There is also a widespread use of incentives (eg faster refunds of overpaid taxes and extended filing periods). Tax professionals, who prepare a fair proportion of tax returns in many countries, are critical stakeholders to the effective operation of electronic filing systems and are consulted widely.
Our tax reforms are grappling with exemptions. Its not an easy task to remove exemptions, partly due to political considerations and partly due to vested interest groups.
The government needs to lower tax rates simultaneously given the fact that tax incentives are being phased out. Gradual moderation of tax rates results in reduced dependence on indirect taxes. India is yet to experience moderate corporate tax rates, though we seem to be ahead in phasing out tax exemptions.
In so far as services sector is concerned, reforms should ensure alignment of policies with WTO proposed GATS. This would assist in sorting out issues on coverage of services and exempt services.
Statistics from the Global Competitiveness Report of the World Economic Forum identifies Indias tax structure and compliance as one of the major obstacles to run a business.
A recent IMF-PwC study reveals that Indias tax code is the most lengthy legislation. The need for reforms is of urgent importance. We certainly need a blue print for the next few years.
Mukesh Butani (The author is a partner with BMR & Associates and these are his personal views)