We ask the experts how substantial increase in the taxpayers’ base for both direct and indirect taxes will impact the projection of the tax GDP ratio

There is substantial increase in the taxpayers’ base for both direct and indirect taxes in last few years due to various government initiatives and reforms. We ask the experts about its impact.

Girish Vanvari, national head of tax, KPMG in India

Tax to gross domestic product (GDP) ratio is the ratio of taxes collected by a government and the GDP of the nation. Taxes constitute an important component of revenue and the aforesaid ratio is a key barometer that indicates the ability of the government to invest in various development initiatives. India has had a comparatively low tax-to-GDP ratio due to low direct tax base, parallel economy and unorganised sectors that adversely impacted tax collections. The two big reform measures undertaken by the government through demonetisation and GST are expected to improve the tax-to-GDP ratio and one can expect the government to exceed its estimated tax-to-GDP ratio, as mentioned in medium-term fiscal policy statement. Buoyant tax collections would mean that the government would have the fiscal room to invest in priority sectors. Considering the slack in private investment, an increased public expenditure in sectors like infrastructure and affordable housing would have a multiplier effect on other sectors and help raise demand for core sectors such as steel and cement. Further, considering the impending elections in 2019, one can expect the government to increase allocation to various social welfare schemes, which would increase the disposable income in the hands of the public and hopefully provide an impetus to private consumption leading to overall economic growth.

Suresh Surana, founder, RSM Astute Consulting Group

India’s tax-to-GDP ratio which stands at 16.6% has traditionally been lower than other developing economies. As per the earlier economic survey 2016, India’s ratio of tax-to-GDP stood 5.4% below that of comparable emerging countries. Some of the reasons for this sluggish tax-to-GDP ratio could be attributed to factors such as the so-called parallel economy, lower per capita income, tax litigations, tax exemptions for agricultural income and lower compliances. Goods and Services Tax (GST) has been implemented this fiscal year and it is expected that this would add at least 1% to the GDP. There could be a marginal improvement in the tax-to-GDP ratio this fiscal, which may touch the 17% mark. GST is expected to be a major attributor for contribution to the tax collections and bringing the unorganized sector into the compliance bracket.

The annual financial statement, which is released by the central government as part of the Economic Survey, provides a fair estimation of the areas of tax spending. It is notable that more than 25% of the tax collected is spent towards interest servicing and there are major allocations to the defence sector, which is a prerequisite considering the need for strengthening our borders. Other significant cost centres include the salary and pensions, allocation to railways, grants-in-aid to state governments, agricultural sector including food storage and warehousing.

D.K. Srivastava, chief policy adviser, EY India

With GST, the number of taxpayers registering with the GST Network (GSTN) is increasing sharply. According to the income-tax department, the number of assessees for income and corporate tax has also increased from 43.6 million in 2011-12 to 51.70 million in 2014-15. Post-demonetization and GST, there is a strong expectation that India’s tax-to-GDP ratio will improve. In 2014, as per IMF data, the other BRICS countries had the following figures: 23.1% in Brazil, 19.4% in Russia, 29.1% in South Africa in 2015 and 19.7% in China in 2014. India has not been able to provide the much-needed expenditure on health, education and infrastructure.

The prospects of the tax-to-GDP ratio increasing in FY18, however, are limited. The spurt in GST registrations is partly explained by the need for multiple registration of taxpayers who operate in different states. The increase in direct tax registrations has also not resulted in any tangible increase in the centre’s direct-tax-to-GDP ratio. Yet, with the black economy being squeezed and greater formalisation of the economy, as also the IT-based cross-verification of direct and indirect taxes, there would be a progressive reduction in tax evasion and avoidance leading to an increase of about 1% per year in the tax-to-GDP ratio for the next 4 to 5 years. An increase in the tax-GDP ratio by 4-5% will provide a sustainable basis for reaching our potential growth of 8% plus.

Aditi Nayar, principal economist, ICRA Ltd

The gross tax collections are estimated at 11.3% of GDP for FY2018. Over the near-to-medium term, fewer cash transactions following demonetisation and the reporting requirements of GST are likely to squeeze the under-reporting of volumes and earnings by some businesses and individuals.

Higher compliance is expected to boost the tax base and the revenues of the government over the medium term.

In our assessment, the government’s gross tax collections could rise to 12.0-13.5% of GDP by FY2020, which would contribute towards fiscal consolidation, creating space for additional spending.

Enhancement in the tax-to-GDP ratio could be directed to the recapitalization of public sector banks (PSBs). ICRA estimates that the PSBs require an incremental equity capital of up to Rs1 trillion and additional tier-I (AT-1) capital of Rs20,000-40,000 crore during FY2018 and FY2019, to meet the regulatory norms. Investment in infrastructure, such as affordable housing, roads, railways, ports and airports, would improve the ease of doing business, and have a multiplier effect on economic growth.

Increasing spending on education and health would strengthen the social security net. The enhanced tax revenues would also reduce the dependence on disinvestment and dividends from public sector firms, to keep the fiscal deficit in check.