Plateauing of national tax base and its fallout
Even as the government announces another set of amendments in the Income Tax Act to expand the tax base by tapping into incomes prone to evasion, the government data seem to suggest that the country’s tax/GDP ratio has remained unchanged over a long period of time. The Economic Survey Report 2022 reveals that despite all claims made by the government over years, the ratio has not changed much over the decade. It was 7.5% in 2012–13, and going by the budget estimates, the same is going to be 7.4% in 2022–23.
When the taxes of the states and Centre are taken together, the tax/GDP ratio continues to hover around 17% for the last 10 years. Compare this to China’s 22% (in 2019), America’s 25.5% (in 2020), Mexico’s 18% and the average of Asia Pacific at 21%. This has been an area of concern for a long time, but nothing seems to have worked so far. The GST, once hailed as cure for all of India’s tax troubles, has not been able to make much of a headway on this front even as it is about to complete five years later this year.
Policy analysts and economists love to refer to these numbers and frown over India’s inability to increase its tax-GDP ratio. The situation certainly requires attention, but it is not too alarming. The government, therefore, should not unnecessarily keep increasing tax compliances in the name of raising the revenue base. Every year, a new set of transactions are brought under the ambit of TDS/TCS so that no income goes unnoticed by the I-T department. But in doing so, businesses are getting burdened with compliances.
We have to keep in mind India’s demographic realities before pushing too hard on the tax accelerator. India is a lower middle income country (according to the World Bank) with a per capita income around $2,000. We have a large section of the population below 18 years (41% as per 2011 Census), and the woman participation in the labour force is below 20%. We, as a policy choice, have avoided taxing farmers. A higher tax-GDP ratio would require incremental changes in all those fronts, and it won’t happen overnight, no matter how hard the government tries.