Are you paying more? Tax rates across the world and how India taxes

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February 29, 2020 5:00 AM

A comparison of India’s corporate tax rates with those of other brics nations and developed economies shows India treads a median path.

tax rate, singular tax rateRarely does a country have a singular tax rate.

Tax systems in countries differ, and it is difficult to ascertain the ideal tax rate as this would vary depending on the political economy and levels of inequality. All governments try to lower tax rates, but there are always fiscal pressures that come in the way of policy. In this context, it is useful to see how our tax rates compare globally.

Rarely does a country have a singular tax rate. The principles of public economics are based on the ability to pay, with the state taking on the job of redistribution. Therefore, one can look at the highest tax rate as an indication of a regime’s obtrusiveness. In the case of corporate tax rate too, various models are pursued—even in India, companies can follow alternative regimes—and companies receive several exemptions; hence, tax rates per se may not be strictly comparable. The same holds for taxes on goods—GST, while now a staple in most countries, has different structures. For instance, it may not always be applicable at a single rate, with governments differing on nature of goods and services and some taxing necessities at a lower rate.

To make a meaningful comparison, the data here is sourced from Trading Economics to maintain homogeneity. Comparison is made between the corporate tax rate, highest income tax rate, and sales tax rate of 10 countries (five developed countries, and the BRICS nations) to see where India stands.

The accompanying graphic shows that Russia has the lowest tax rates—for individuals as well as corporates. However, at 20%, the goods tax remains on par with that in other countries. The developed countries have rates significantly higher than India’s when it comes to personal income, reflecting the relative friendliness of our tax regime. Corporate tax rate in India is lower than that in half the countries considered, and hence, comes at the median level. Evidently, the government has made efforts to rationalise tax rates on both counts, and while the issues of exemptions can be debated, it is significant that India is well-aligned with global standards.

As for taxes on goods, India’s 18% rate is at the lower end—South Africa, China, Japan, and Brazil do better. GST rates are not cast in stone, and in the last couple of years, several changes have been made to them, and over a period of time, these rates can be expected to reach equilibrium. Therefore, India appears well-positioned on the tax curve.

Interestingly, barring Brazil and Russia, in all countries considered, the corporate tax rate is lower than the personal tax rate, implying industry is favoured. This is significant because when profitable corporates pay lower taxes than individuals, the surplus goes back to shareholders, who constitute the elite.

The other issue on budgets relates to deficits and government debt. Here, too, there are problems with defining what constitutes deficit and debt given that all countries have the concept of off-balance-sheet activity, which get aligned to the accounting standards. Yet, based on the commonly accepted definitions, these two variables have been plotted in the accompanying graphic to give an idea of how much our budgets are aligned with those of other countries.

This quite revealing because it again shows that India is well-placed in the global context. The fiscal deficit at 3.3% (excludes states) is on par with most countries, and is sixth on the list. USA has the highest deficit among the developed nations. While such levels can be justified given that the dollar is the world economy’s anchor currency, the fact remains that the government is definitely spending more than it earns. Germany runs a surplus, as does Russia, which has the benefit of oil money. China, too, has a deficit of 4.2%, which reinforces the rather aggressive role governments play in emerging markets as this is during a slowdown in the world economy.

India’s debt-to-GDP ratio includes state liabilities, and, at 69.6%, is at the median level. The developed countries, enjoying the benefit of international currencies, have higher debt ratios—USA and Japan are above 100%, and the UK, backed by the pound, has a ratio of 81%. The ratio for France is also close to 100%. For the Euro currencies, these ratios have been moderated since the Euro crisis, which led to substantial restructuring and has only stabilised recently.

India can take comfort in the fact that its debt ratio is denominated in rupees and hence poses no contagion risk in extreme situations. The government, too, has shown character in following the FRBM path. The 3.3% number—3.5% for FY21—combined with states’ deficits of not more than 3% would amount to 6.5%, which the system can support.

Hence, while there has been a call for fiscal stimulus, the government has been prudent in not allowing fiscal numbers to go overboard. At the same time, the tax reforms have worked towards aligning rates with global standards. While there is still scope, given the highly diversified tax paying class, for tinkering with rates, the principles of public economics have largely been adhered to. Critics may highlight the inclusion of contingent liabilities, but to make a fair assessment, government assets would also have to be included in the calculation. Often, this point is missed, and liabilities of PSUs are pointed at without looking at their assets, which have significant value.

The writer is Chief Economist, CARE Ratings. Views are personal

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