India being a democratic country has a diverse and proliferating population. To run such a huge economy, like any other country, India too has a diverse taxation policy. The taxation system has been divided amongst three bodies at different levels of the society. The first is the Central Govt. which levies taxes on income (except agricultural income; this is levied by the state), custom duties, central excise and service tax. Next in line comes the State Govt. which is responsible for undertaking VAT, stamp duty, profession tax, etc. Then are the local bodies that imply taxes on property, octroi and utilities, etc.
There are some differences between the taxation policies of India and the rest of the world. This dichotomy exists because of the different functioning of the economies or in same case because India is still a developing economy. Few outlining differences are there which shall be looked upon to by the government as they may not prove helpful to the economy.
The data from Organization for Economic Cooperation and Development (OECD) and India’s Ministry of Finance spanning over nearly 50 years (1965-2013) across 35 countries reveals that India is indeed an outlier. In a recent visit to India, famous French Economist Thomas Pikkety said that there is a twin deficit issue in India’s taxation policy; i.e. India taxes its citizens much lower in proportion to its GDP vis-à-vis other comparator economies and a substantive portion of such taxes are collected through largely regressive and distorting indirect taxes rather than direct means.
Taking the tax-to-GDP ratio into consideration; the ratio increased from 10.4% (1965) to 17.2% (2013) and this included both central and State tax revenues. Comparing this to the subset of OECD countries, India still has a lower ratio at 17% versus an average 24% for others. It is rightly pointed out by Piketty that India’s overall tax revenues are very small for the size of the economy. Whether or not there should be a desirable tax-to-GDP ratio, is still an unsolved question. Some postulate that this ratio is or should be a function of its per capita GDP. But this is not true when looked at India’s stats. India has seen its tax-to-GDP ratio constant although its growth rate increased, thus belying those who predicted an increase.
Another deviation in tax structure is in terms of split of total tax take between direct and indirect taxes. India’s direct to indirect tax ratio is roughly 35:65 whereas that for OECD countries is 67:33; opposite to that for India and in favor of direct taxes. In the period of analysis of the data, the ratio of direct to indirect taxes for India has swung from a low of 13:87 to 35:65, while that for others has remained roughly constant.
Another instrument is the total tax rate which measures the amount of taxes and mandatory contribution payable by businesses after accounting for allowance deductions and exemptions as a share of commercial profits. This rate is quite high for India with only China exceeding India. Not only have these, but progressivity of tax structure also differs for India. Country’s dependence on direct tax tends to measure level of tax progressivity in the system. While taking the case of developing countries, they depend primarily on revenue from indirect taxes for the functioning of the economy. Progressivism in Indian tax system is far below international levels.
Whatever the opt ratio might be, the bottom line is that, while economist may disagree on what India’s tax-to-GDP ratio ought to be, it is way below OECD countries. It is important to increase the share of taxes in GDP and that too should be in favor of direct taxes. India should remove the tag of being an outlier relying more on indirect taxes. Economic problem of income inequality in the country is aggravated by the regressive nature of Indian tax structure. India’s tax system and policies need to be evaluated not only from the perspective of gender but also for the underprivileged sector of the society, for all the people who reside in the country; diversification is important as the benefits must reach one and all.3