While all of us want to pay less tax and feel that the tax rates in the country are very high, we also tend to get critical of the government for a lot of expenditure where we like to pass value judgements. There are also the accompanying conclusions drawn of government expenditure being intrusive and drawing away resources from the private sector. Are there any such benchmarks as to what should be the ideal rates or levels of expenditure
In this context, it is interesting to view how India stacks up in the global context in these fiscal aspects. The accompanying table provides data on tax rates, tax burden, government expenditure and public debt for a set of 15 countries covering both the developed economies as well as emerging markets. The results are quite revealing.
First, the tax burden appears to be one of the lowest for India which means that, as a nation, we actually pay far less tax than other nations. This may be attributed to the predominance of a very large unorganised sector which is not quite captured in the tax net due to issues of identification. Also, large volume of consumer transactions are not based on cash memos and hence do not get billed along the way. Add to this the quantum of black money which goes into various transactions especially in the real estate sector and the government actually loses out on a lot of revenue due to this identification problem.
Second, the customs tariff rate calculated on an average basis is one of the highest with only Brazil and South Korea having more aggressive rates. This is an issue which comes up regularly in the WTO summits where the arguments on protection through tariffs are often the crux of discussions. The Indian case is different as we also are pressurised on the CAD front where lower import duty can lead to an increase in imports and exacerbate the deficit. The recent episode of import of gold and the corrective action of raising tariffs is an example of why India has to be discreet when lowering these rates. And given that customs account for around 15% of total tax revenue, lower tariffs and absence of elasticity in imports would mean lower revenue for the government.
Third, the highest marginal income tax slab is again on the lower side, with only Brazil and Hong Kong having rates of less than 30%. Arguably, various countries have their own system of providing exemptions and inclusions for the purpose of reckoning taxable income but this one is the highest tax rate. Quite clearly, Indias income tax rate is well within the global level. Interestingly, the developed countries have their peak marginal tax rate at close to 50%.
Fourth, in case of corporate taxation, the rates are quite varied. Germany and Hong Kong have rates lower than 20%, while the UK, Thailand, Korea, Japan, China and South Africa have attractive rates of less than 30%. This does help to provide an impetus to industry to produce more, and most of these nations are also well industrialised, which means that lower rates do have a strong relation with output. Here it appears that India Inc would have a genuine cause to argue for lower tax rates especially in difficult times. Currently, the government is less willing to relent as this is an assured source of income due to the audit trail which exists. But there could be the counter argument that the number of exemptions and deductions permitted for calculating taxable income is more liberal than that in other countries which is compensated for by a relatively higher tax rate.
On the expenditure side, a generalised observation is that governments in developing countries are relatively less intrusive in terms of claims on GDP. The ratio is less than 30% in the Asian economies but higher in Latin America. For all the five developed economies, the ratio is much higher in the range of 40-50%. This does come as a surprise as it would appear that governments have to play a more active role in the development process in emerging markets where poverty levels are higher. Also, the developed economies which are capitalist should typically have less of government.
As a corollary to the levels of government expenditure being high in the developed countries, the public debt-to-GDP ratio is also higher relative to the developing countries. This also gels with the sovereign debt crisis in Europe and the perennial debt overhang in Japan and the more recent controversy on debt ceiling and shutdown in the US. The developing nations actually fare better here.
Putting all these thoughts together, the impression one gets is that we are not quite a heavily taxed nation and the tax rates are not really inhibitive. On the expenditure side, the government does not claim a large part of the GDP which is driven more by private enterprise and, hence, even the public debt level is not really misaligned with global trends.
The author is chief economist, CARE Ratings. Views are personal