Widen base to achieve a higher tax-GDP ratio

In what may bring cheer to the well-heeled in the wake of a raging pre-Budget debate over squeezing more out of the super-rich class, the Economic Survey has suggested the government’s efforts to raise additional revenue should be through widening of the tax base and not by increasing the rates.

Broadening the base

Coming as it does in a scenario when revenue targets on the direct and indirect tax front are unlikely to be met, it is, however, not certain which way the budgetary proposals go.

Alongside, however, it is reassuring for the Survey to say that such a move of higher tax rates would be counter-productive.

“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 — higher and higher tax rates impinge more and more on incentives to undertake taxable activity, while encouraging tax evasion,” the Survey said.

Even as economic analysts and experts, including Prime Minister’s Economic Advisory Council (PMEAC) Chairman C. Rangarajan, have favoured higher tax rates on the super-rich, the Survey has stressed that it is better to achieve fiscal consolidation partly through a higher tax-GDP ratio than merely through reduction in expenditure as it would only hurt development spending.

Tax-GDP ratio

The tax-GDP ratio, after touching a peak of 11.9 per cent in 2007-08, declined to 9.6 per cent in 2009-10 and went up marginally to 9.9 per cent in 2011-12. “Raising the tax-GDP ratio to above the 11 per cent level is critical for sustaining the process of fiscal consolidation in the long run,” the Survey argued.

Noting that with gross tax revenue in April-December, 2012, growing by 15 per cent to over Rs.6.81 lakh crore was ‘significantly’ short of the growth envisaged in Budget for the current fiscal, the Survey pointed out that the slippage in collection in the nine months of the fiscal indicated the “stiff challenge in the fourth quarter of the current fiscal for better marksmanship.”

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