The Union Budget for 2013-14 provides the government an opportunity to reorient tax policies towards greater revenue mobilisation and pursuing a more inclusive development path, as is aimed for in the 12th Five-Year Plan.
Several civil society organisations have impressed upon the Union Finance Ministry to address the lack of progressivity in the country’s tax system and raise the much needed additional resources for financing education, healthcare and food security. India currently raises only 15.5 per cent of its GDP as tax revenues, making it one of the lowest taxes of all G20 countries. By comparison, the average tax to GDP (gross domestic product) ratio in OECD (Organisation for Economic Cooperation and Development) countries is almost 10 percentage points higher at 24.6 per cent.
Nisha Agrawal, CEO of Oxfam India, comparing India’s tax regime with those in other G20 countries observed, “Not just the developed countries, even other developing countries like Brazil, China, South Africa, Argentina and Turkey have a higher tax-GDP ratio than India. Furthermore, other countries rely more on direct taxation, which raises greater revenues from those who can afford to pay more, and therefore have a more progressive structure of taxation than India. It is imperative that India’s tax revenue mobilisation is stepped up and we rely more on direct taxes instead of indirect taxes, which are regressive because they affect the rich and poor alike.”
It was highlighted that among the BRICS (Brazil, Russia, India, China and South Africa) countries, India mobilises the lowest magnitude of property taxes, which usually include wealth, inheritance and municipal property taxes. Over the period from 2000-01 to 2007-08, property taxes contributed on an average 15.1 per cent of the total tax revenue in the U.S., 5.8 per cent in South Africa, 5.1 per cent in China, 4.87 per cent in Russia and 4.25 per cent in Brazil. In contrast, these taxes contributed only a meagre 0.44 per cent in India. A conservative estimate of the revenue potential of inheritance tax and wealth tax in India has been found out to be Rs. 63,539 crore per annum or 0.8 per cent of GDP as of 2011-12. This is roughly equivalent to current public expenditures on healthcare (0.9 per cent of GDP).
Therefore, with the introduction of property taxes, which would largely fall on the wealthy, India could double public expenditure on health care and begin to make a dent in the very high rates of infant, child, and maternal mortality.
Vinod Vyasulu, a Bangalore-based economist, added: “Considering the extent of inequality in the country, wealth and inheritance tax is important not just from a revenue mobilisation perspective but also to check concentration of wealth in the hands of a few and promote equal opportunity as is enshrined in the Constitution.”
John Suresh Kumar of Christian Aid emphasised the need to review and rationalise the gamut of exemptions in the Central government tax system, which were estimated to be worth six per cent of GDP in 2011-12. “Tax breaks should be project-specific, and should not be treated as a ‘cost-saving’ source for corporations seeking sustained tax holidays. There is a need for a Position Paper on tax exemptions providing detailed sectoral break-up of revenue foregone for different industries with a comparative assessment regarding objectives of exemptions fulfilled vis-à-vis magnitude of exemptions.”
Subrat Das, director of Centre for Budget and Governance Accountability, highlighted the loopholes in international taxation noting India’s commitment at G20 to tackle tax evasion and illicit financial flows and pointed out that wooing investors should not be at the cost of this commitment. He added, “Although discussions are said to be in progress to amend India’s Double Taxation Avoidance Agreement (DTAA) with Mauritius, a comprehensive review of all DTAAs by the country is needed to understand the revenue implications and extent of treaty shopping currently taking place. Relevant data detailing transactions that avail of treaty benefits (which are currently unavailable) should be recorded and made available publicly. Such a review, with the relevant data, will help establish the need for DTAAs and explore more efficient alternatives.”
The organisations feel that through these various methods — increasing direct taxes, particularly wealth and inheritance taxes, eliminating corporate exemptions, and closing loopholes on tax avoidance, India could easily raise up to 20-25 per cent of GDP as tax revenues, which is the amount that would be necessary to fund a modern welfare state that can deliver on its objectives of faster, inclusive, and more sustainable development.
