The Prime Minister has outlined the period from 2022 to 2047 as the period of Amrit Kaal. It is the PM’s vision to make India a developed country during this golden phase. To realise this, India needs to rapidly invest in its social infrastructure. This investment would need to come from taxpayer’s money and not borrowings.
India’s tax-to-GDP ratio is still below the critical mark of 15 per cent, which is when a country starts to comfortably get resources to make quality expenditures. India’s gross tax to GDP, which was 11 per cent in FY19, fell to 9.9 per cent in FY20 and marginally improved to 10.2 per cent in FY21 (partly due to decline in GDP) and is estimated at 10.8 per cent in FY22. This is much lower than the emerging market economy average of 21 per cent and OECD average of 34 per cent.
The five predominant reasons for the low tax to GDP ratio are: a large informal sector and high incidence of tax evasion; tax exemption for agriculture; poor direct to indirect tax ratio of 35:65 vs OECD ratio of 67:33 in favour of direct taxes; low per capita income; and high incidence of tax litigation.
Among these, factors which can yield immediate returns are, identifying more tax paying sectors and accelerating compliance. The government needs to widen the tax base and resist the temptation of overtaxing some segments, which often backfire with growth in evasion, pushing the economic activity underground.
Data shows that the five most common means of tax evasion in India are smuggling and illicit trade; not paying income tax by concealing income; evasion of GST by not reporting or under-invoicing sales; evasion of excise duty by undisclosed manufacturing; and international corporate tax abuse.
Consider illicit trade and smuggling. According to a FICCI CASCADE report, the two most smuggled goods are alcoholic beverages and tobacco which account for 49 per cent of the tax loss from illicit goods.
The estimated tax loss from illicit trade of tobacco products is ₹13,331 crore and ₹15,262 crore for alcoholic beverages. This is what the parallel trade earns at the cost of the nation.
Another example is online gaming where high TDS to the tune of a flat 30 per cent on gaming income is creating an incentive for offshore illegal gambling platforms to thrive in India.
Legally compliant gaming platforms have the added burden of paying GST, and if this was applied on the entire gaming consideration, as is rumoured, it will act as a booster for offshore gaming players to further penetrate the Indian market as our boundaries for digital transactions are fragile. No wonder, offshore gaming platforms are appointing sports and cinema stars as brand ambassadors to lure Indians.
According to Finance Ministry data, only 1 per cent of Indians pay income tax and declare earnings above the non-taxable threshold. Only 5.78 crore income tax returns were filed by individual taxpayers for FY2018-19 till February 2020. Out of this, only 1.46 crore individual taxpayers filed returns declaring income above ₹5 lakh. This does not match with the population of cars and two-wheelers in India, none of which at the current inflationary prices can be afforded by people below an annual income of ₹5 lakh.
A report by the State of Tax Justice states that India is losing around ₹75,000 crore in taxes every year due to international corporate tax abuse and private tax evasion.
Majority of Indians have a mindset against paying taxes. So the government must push for widening of taxes, while keeping the incidence of tax low. This also means giving up the temptation to further tax the taxed, even if these are wealthy individuals or sin goods to prevent evasion and foster a deeper culture for compliance for the development of the nation.
The writer is General Secretary - Think Change Forum