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Indias tax-GDP ratio still less than half OECDs
April, 21st 2011

The Centre's tax collection for 2010-11 has reportedly exceeded the revised estimates by about Rs 12,000 crore to hit Rs 7.92 lakh crore.

This is good news for fiscal management and on the economy's performance. Corporate tax revenues , for instance, consistently grew at 20% through the year. Excise duty grew at well over 35%, marking an outstanding growth after years of single-digit rise.

Although in part, the robust increase in excise was due to the withdrawal of the fiscal stimulus - the duty was increased by two percentage points effective April 2010- positive consumer sentiment has also helped drive up demand for manufactured items. However, it was the customs collection that recorded the most stunning rise, climbing over 60% thanks to a flare-up in crude oil prices.

Such vigorous growth in revenues is unlikely to be sustained in the current fiscal, particularly when the economy is beginning to slow. Growth is bound to be negatively affected by the continued tightening by the Reserve Bank of India in its bid to calm inflationary pressures, high cost of capital would force companies to postpone investment and also dampen consumer sentiment.

Customs collection too may experience a decline if the government were to lower duty on crude in a bid to prevent price shocks for the domestic consumers. Despite the robust increase in tax collection in 2010-11, the Centre's collection accounts for just about 10% of GDP. Together with states' collection, tax revenues of the government account for just about 16% of GDP.

That compares very poorly with the tax-GDP ratios of developed nations. For instance, the tax-GDP ratio for the UK is 34.3%, for Germany 37% and about 24%for the US. The nation needs to urgently continue reforms of its taxation regime to not only widen the net, so as to bring more people and businesses into it, but also to reduce evasions.

Implementation of the goods and services tax is one reform that the Centre and states must achieve a consensus on at the earliest. Information technology-enabled intelligence is the key to collate economic information and convert it into dogged tax collection.

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