Over-taxed

It is with a sinking feeling that taxpayers must have received the Finance Minister’s exhortation to ratchet up India’s tax-to-GDP ratio by a further 1.5 percentage points over the next four years. Indian taxpayers are already an over-burdened lot, coughing up high rates of direct taxes, GST and a variety of cesses, apart from putting up with compliance requirements that get more complex by the year. The NDA regime has also been on a tax collection overdrive in the last couple of years, following up its ‘surgical strike’ on high-value notes, with sweeping powers to the taxman to issue demand notices and conduct search and seizure operations. For the last three years, India’s tax collections have grown at an exceptionally brisk pace at a time of modest income increases and sluggish economic growth. Therefore, the Centre should now be looking to prune its sky-high tax rates instead of demanding even higher pay-outs.

India’s direct tax mop-ups have expanded at 13 per cent per annum in the last three years while nominal GDP grew at just 10 per cent. GST collections, despite persisting refund glitches, have recently hit the ₹1 lakh-crore monthly target. Income tax return filers have vaulted from 3.9 crore to 6.8 crore. These improvements in compliance metrics have come about despite India retaining one of the most citizen-unfriendly tax regimes in the world. India’s effective corporate tax rate of over 34 per cent is far higher than the global average of 22 per cent; it is a distinct global outlier after the sharp pruning of taxes by the US. Promises by the NDA government to effect an across-the-board cut in the corporate tax rate to 25 per cent have remained on paper. Surcharges, cesses and taxes on dividends, interest and capital gains add on to the personal tax burden of 10-30 per cent. The GST, envisaged as a simple regime, has been muddied by the adoption of five rate slabs with peak rates as high as 28 per cent, with whimsical cesses on ‘sin’ goods. The exclusion of petroleum products from GST also enables the government to levy usurious taxes on fuel which refuse to abate with rising prices. Recent additions to India’s tax base have come from the lowest rung of the income ladder too, suggesting that the direct tax base may be reaching a saturation point.

While India’s low tax-to-GDP ratio is cited as proof of continued non-compliance, this is a flawed metric as it fails to account for income disparities and the low level of formalisation in the economy. The Economic Survey of 2015-16 had convincingly argued that India’s tax-to-GDP ratio was in line with its peer group of emerging nations once adjusted for its stage of development. Thus, having extensively deployed the stick to drive up tax compliance in the last few years, it is time the Finance Minister thought of carrots.

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