Aim for higher tax-GDP ratio; expenditure contraction not key route for fiscal consolidation

| | | Updated on: Feb 27, 2013

India would do well to achieve fiscal consolidation partly through a higher tax-GDP ratio than merely through reduction in the expenditure to GDP ratio, the Economic Survey has said.

Also, it is much better to achieve a higher tax-GDP ratio by broadening the base which is taxed rather than increasing marginal tax rates significantly, the Survey has suggested.

Simply put, Survey has pitched for greater focus on widening the tax base instead of looking at higher tax rates on those in the highest income slab.

This dispassionate view of the Finance Ministry comes at a time when there is an intense debate in the country on whether higher taxes should be imposed on the super-rich or not.

After reaching a peak of 11.9 percent in 2007-08, the tax-GDP ratio had declined to 9.6 percent in 2009-10 and was placed at 9.9 percent in 2011-12.

"Therefore, raising the tax-GDP ratio to above 11 percent level is critical for sustaining the process of fiscal consolidation in the long run", the Survey said.

The Economic Survey 2012-13, which is an effort of group of economists led by Chief Economic Advisor Raghuram Rajan, has highlighted that higher and higher tax rates impinge more and more on incentives to undertake taxable activity, while encouraging tax evasion.

It has made a case for focusing on higher tax-GDP ratio than reduction in expenditure to GDP ratio, in view of the large unmet development needs.

Published on March 12, 2018

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