Finance minister Arun Jaitley has, on more than one occasion, said that India is a nation of poor tax compliance, and that characterisation is also in keeping with the large estimates of the country’s black economy. What really matters, however, is whether India is the laggard when it comes to poor compliance or whether, once you account for India’s low per capita income, the tax ratios look as bad; equally important, is the role of tax policy in this state of affairs. The Economic Survey of 2016 had some interesting points to make. In its words, “a simple comparison of aggregates with other countries indicates that India under-taxes and under-spends”, but “controlling for the level of economic development, India neither under-taxes nor under-spends”. The Survey plots taxation and spending levels for all countries and finds India “is close to the line of best fit in all the figures”. It then goes on to do a similar exercise based on how democratic a country is and finds that India both taxes less as well as spends less than most other democracies —even here, though, when it comes to direct taxes, India is not an outlier.
The Survey, in fact, makes an interesting point about the role of government in this. Since many comparisons put China’s number of taxpayers as more than those of India, even when its income levels were similar to those of India, the Survey asks “how many taxpayers (would there) have been in 2012-13 if the threshold had been maintained atRs 1,50,000 (the threshold limit in 2008-09)… we find that there would have been an additional 1.65 crore units incorporated within the taxation system (an addition of about 39.5 percent) and tax revenues would have been around Rs 31,500 crore greater … India’s tax-GDP would have increased by 0.32 percent just by not having raised the threshold so generously”. Now add to this the fact that, with agriculture not taxed, over 60% of the population is out of the ambit of the tax system or the various other exemptions given for senior citizens, etc—according to the 2016 Survey, “nearly 85 percent of the economy is outside the tax net”.
Despite this, the good news is, with rising per capita incomes, the tax-to-GDP levels are rising quite well—this is both due to increasing formalisation of the economy and a possible tipping point when per capita incomes rise above a certain level as well as the fact that the government’s capacity to ensure compliance also rises. Between 2000-01 and 2017-18, while India’s GDP rose 7.7 times, central tax revenues rose 10.3 times, as a result of which tax-to-GDP rose from 8.7% to 11.6% and, if all goes to plan, this will rise to 12.1% in FY19. During this period, personal income taxes, as a ratio to GDP, are up from 1.5% to 2.6% and are projected to rise to 2.8%. Corporate taxation levels (as a share of GDP), have been falling for several years, in keeping with the slowing of corporate profitability, and had this not happened, tax revenues would have grown even faster. India can get much higher taxes with more compliance—the latest Survey has a lot of data on how various local bodies are not collecting property taxes adequately—and the role of Aadhaar in this cannot be over-emphasised, but it is important to recognise that tax revenues cannot be divorced from the level of economic development.