The supreme court?s direction to the central government to track the sources of black money and to look at the issues in a larger perspective rather than just a tax evasion problem has raised questions about the extent of tax evasion and the efficacy of tax administration in the country. But contrary to perceptions, the tax collections have improved significantly in the post-reform years, especially in the last decade.
The numbers show that the total tax collections of the central and state governments has touched a high of 17.7% of the GDP in 2007-08 and then slipped marginally to 16.5% in the budget estimates for 2009-10. In contrast, the total tax collection of both the Centre and the states was just about 15.7% in 1991-92, at the start of the reforms, with most of it coming from indirect taxes.
The bulk of the gains have been due to the improvement in direct taxes. In contrast, the indirect taxes, which are levied on goods and services and collected by central and state governments, have seen their relative share decline. Trends during the decade show that the share of direct taxes, in the total taxes collected by central and state governments, has gone up from 36.4% in 2001-02 to 70.3% in 2009-10.
Most of the gains in the share of the direct collections accruing to the central government came from corporate taxes. The corporate tax to GDP ratio has, in fact, almost trebled, going up from 1.6% in 2001-02 to 4.1% in 2009-10. The gains from income tax, paid by the middle and high income groups, has been less significant with the income tax to GDP ratio going up from 1.4% to 2% during the period. So, the overall trends show that the direct tax collections have gone up and that the evasion of direct taxes has been stymied.
In the case of indirect taxes collected by the central government, the excise duty collected from manufactured goods has registered a sharp fall, down by half from 3.2% of GDP in 2001-02 to 1.6% in 2009-10. This is mainly on account of a reduction of excise duty rates and the set off allowed on input taxes on both goods and services?it also suggests tax evasion. The trends are similar in the case of customs duty also, where the collections have dropped from 1.8% of GDP to 1.4% of GDP during the decade, mainly on account of the lower tariff rates. The only indirect tax that has shown some buoyancy is services taxes, where the collections went up from 0.1% of GDP to 0.9%, mainly on account of the extended coverage and higher rates. However, these gains are minimal, given that share of services in GDP had gone up from 51% to 56.9% of GDP during the period?the share of service tax in total taxes is a mere 5%, suggesting a huge scope for further increases. In the case of states? own taxes, most of which are accounted for by state VAT, the gains have been minimal, with the ratio going up from 5.4% of GDP to 5.9% of the GDP.