India’s tax-GDP ratio is still abysmally low and hence more people need to be brought into the tax net to create more fiscal space.
What is the status of fiscal deficit in India?
- The government set up a Committee to review the FRBM Act in 2016.
- The Committee recommended that the government should target a fiscal deficit of 3% of the GDP by 2020, which should be reduced further to 2.8% in 2021 and to 2.5% by 2023.
- While the expenditure largely remained on course till November 2018, lower tax receipts would be inflating the fiscal deficit for FY19.
- The expenditure in the remaining months will further make the expenditure go beyond the Budget estimates.
- India’s fiscal deficit was Rs. 5.9 lakh crore, or 3.5% of the GDP, in 2017-18.
- The latest available data show that the government has already touched a fiscal deficit of 114.8% of the full-year estimates by the first eight months of this financial year.
What are the underlying reasons behind the deficit?
- The absolute volume of Central tax collection increased by 3% in the last 10 years.
- But the share of direct tax collection in the same period declined by 3%, which has been compensated by the rise in indirect taxes.
- Indirect Tax – Within the indirect taxes, excise duty collections increased at the fastest pace by 80%.
- This is partly because of excise on crude, which saw multiple increases since 2014 when international crude oil prices were falling.
- Direct Tax – The average direct tax collection since FY09 has been around 55% of the total tax collections.
- The corporate tax collection has been reduced, wherein its share in direct tax fell from 63% in FY09 to 56%in FY18.
- However, the personal income tax which is considered as a secured source has seen a healthy rise from 35% to 41% during the same period.
- This is because the number of taxpayers under the direct tax net increased in the last 10 years.
- Tax-GDP ratio – The tax-to-GDP ratio has not been impressive for India.
- Ideally with increase in GDP, the tax collection should also increase.
- If the economy is growing and business is doing well, naturally, profits will be better and therefore taxes should also be higher.
- In India’s case while the overall tax-to-GDP (Centre and State) increased from 17.45% in FY08 to 17.82% in FY17, the GDP and per capita income have doubled during this period.
- Interestingly, India’s rate of growth of tax revenues was not in sync with its GDP growth in the post-reforms period.
- Thus, India must aim to double its tax-to-GDP ratio to achieve the OECD target of about 34%.
What should be done?
- Improving tax-to-GDP ratio – India has had a comparatively low tax-to-GDP ratio largely due to low direct tax base and an unorganised sector.
- Direct tax, which primarily involves personal income tax and corporation tax, is more sensitive to GDP growth rate.
- While the direct tax-to-GDP ratio has grown at an average of 5.67% in the last 10 years, real GDP has grown by 7.78% during the same period.
- Thus, the direct tax-to-GDP needs to be increased to create more fiscal space and for that, more people need to be brought into the tax bracket.
- Increasing tax base – The Kelkar Committee report mentions the ‘missing middle’ which include professionals (CAs, lawyers, doctors) who do not pay taxes.
- However, government has presumptive taxation measure for them.
- But, unorganised small retailers who are not in tax net have no presumptive taxation.
- Thus, efforts on more presumptive taxation options to businessmen and professionals in Tier-1 and Tier- 2 cities will aid in widening the tax base.
- Also, agricultural income has to be taxed beyond a large threshold limit.
- India should also promote cashless economy as majority tax evasion occurs in cash transactions.
- Less cash utility will turn the people towards tax compliance.
- Revising tax slabs – Many qualified individuals today directly start their career at the highest 30% tax bracket at Rs. 10 lakhs.
- However, their growth in consequent years may not be substantial.
- Thus, the government can widen the 20% tax slab beyond Rs. 10 lakhs to give relief to such tax-payers and increase their disposable income.
- Raising tax deduction – Section 80C allows individuals and HUFs to claim tax deduction of up to Rs. 1,50,000 from their gross total income for certain investments and payments.
- These tax limits to these investments, which include provident fund, national savings certificate etc., could be increased further to encourage individuals to save more towards their retirement.
- Additional deposits into these schemes could help the government garner more resources for long-term projects.
- As per sections 44AA of the Income-tax Act, 1961, a person engaged in business is required to maintain regular books of account under certain circumstances.
- To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the presumptive taxation scheme.
- A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account.