Taxing for growth

By Manoj Pant,

According to the First Advance Estimates of the National Statistics Office (NSO), the Indian economy’s growth is projected to slow to a four-year low of 6.4% in FY25. In response to the Covid-19 pandemic, the government had sought to maintain economic momentum by increasing infrastructure spending. This helped boost the headline gross domestic product (GDP), but it did not translate into significant job growth or sustained consumption. Still, to continue with this strategy of government-led spending and to allow for greater social sector investments, the Centre will need to raise more revenues.

However, new metrics are painting a different picture of financial stress. Aggregate net profit for 694 Indian listed companies in the September 2024 quarter grew by just 3.6% year-over-year, marking the slowest growth in 17 quarters. Additionally, an industry report points to an abysmally low salary growth. Indian tech workers saw a mere 3% increase in salaries. Due to inflation reaching 6.2% in October 2024, this however resulted in declining real earnings. This means that workers are unable to maintain their standard of living, which is effectively shrinking.

During the pre-Budget meetings with Union finance minister Nirmala Sitharaman in December 2024, trade and industry associations suggested measures to boost growth by putting more money into the hands of consumers, primarily through tax and tariff cuts.

This raises a critical conundrum: How to balance growth in government revenues while putting more money in consumers’ pockets? The urgency for developing a radically new taxation strategy that addresses this delicate balance has never been greater.

Tax planners have recently been pursuing innovative ways to raise revenues while balancing populist interests. One such attempt made national headlines when the Group of Ministers (GoM), constituted to suggest rationalisation of the goods and services tax (GST), proposed a new sixth GST slab of 35% for demerit goods, along with price-based GST rates. This attracted widespread criticism, and the 55th GST Council’s decision to apply four different tax rates on popcorn — based on its varieties of salt-flavoured, non-packaged, pre-packaged and labelled, or caramel popcorn (classified as sugar confectionery) — became an internet meme.

Such tax announcements turn a simple system into a maze. Complexity kills compliance, and instead of boosting revenue it creates hidden traps that stifle growth. India does not need more tax gimmicks — it needs a clear, fair, and simple tax system that people can understand and embrace right from the top to bottom. Only then can we unlock real revenue growth and economic progress.

For the 2024-25 financial year, India’s total direct tax collection was approximately Rs 15,02,161 crore, of which corporate taxes contributed Rs 6,60,354 crore, while individuals paid Rs 8,03,491 crore. However, the emerging profit stress in the corporate sector suggests that any further increase in corporate tax may hinder growth and cut capital spending. On the other hand, offering tax relief to individuals to spur consumption will increase fiscal deficit.

India can adopt a taxation strategy to raise revenues while reducing the tax burden. This will require lowering peak tax rates and broadening the tax base. India suffers from a weak culture of tax compliance, especially considering that 90% of the workforce is employed in the informal sector. While the informal sector contributes around 50% of India’s GDP, tracking real income and collecting taxes from individuals in this sector is a significant challenge. People in the informal sector, for years, have considered not paying taxes their right, stalling the country’s growth.

A new taxation approach should encourage even small contributions from those who can afford it. If India introduced a nominal tax, such as 1% for those below the taxability limit, everyone could contribute to the formal economy instead of filing nil returns. This would not only generate additional revenue but also pave the way for sustained tax growth through broader participation.

Education and awareness campaigns can shift perceptions about paying taxes and help broaden the tax base while maintaining low rates, as seen in other countries. Brazil has successfully combined sanctions with education since the 1970s through the Receita Federal’s Tax Education Programme, targeting citizens, students, civil servants, accountants, and customs agents to foster tax compliance. Similarly, Singapore has simplified its tax system with the No-Filing Service, where eligible taxpayers receive pre-filled tax returns. In 2023, approximately eight in 10 Singaporean taxpayers had their returns pre-filled, making compliance both easier and more cost-effective.

India has a long road ahead to develop a culture of tax compliance, but immediate steps, including relevant announcements in the upcoming Budget, could be the right start. Ultimately, taxation is not just a fiscal policy but a driver of growth. A well-balanced tax policy, focusing on a broader base and simplified, lower rates, could provide the boost the Indian economy needs for sustainable growth.

As Chanakya wisely said, “Collect taxes from the citizens as honeybees collect nectar from flowers — gently and without inflicting pain.” If India can implement a fair and accessible tax system, encouraging citizens to contribute willingly, it can pave the way for a Viksit Bharat (developed India) by 2047.

The author is Economist and visiting professor at Shiv Nadar University.

Views expressed are his own and not necessarily those of financialexpress.com