Economy

‘Decline’ in tax-GDP ratio

Detailed study: Baldev Raj Nayar's ‘The Myth of the Shrinking State’

Detailed study: Baldev Raj Nayar's ‘The Myth of the Shrinking State’  

The criticism that India’s tax revenue at around 10 per cent of GDP lags behind many countries can be an exaggeration, says Baldev Raj Nayar in ‘ The Myth of the Shrinking State ’ (www.oup.com). When the constituent states are also included in the calculation, the ratio can be close to 15 per cent, he argues.

As regards the relationship between reforms and tax-GDP ratio, the author urges that adequate analysis requires disaggregation in respect of different time periods, political jurisdictions, and types of taxes.

While the period since the inception of economic liberalisation, including the years after the paradigm shift, has seen changes in the tax-GDP ratio, ‘decline’ does not characterise uniformly the entire post-liberalisation period or the entire set of different kinds of taxes, he reasons. Also, “To compare tax-GDP ratios alone is to take a static and limited view, for even lower ratios in a period of higher growth were productive of far larger revenues.”

Going behind the ‘decline’ charge, Nayar finds the critics harbouring the notion that the state has been remiss in mobilising resources from those who have benefited from economic liberalisation; a notion premised on the policy actions to lower tax rates as part of economic reform.

He explains that higher tax rates do not necessarily lead to higher tax revenue. “Indeed, the policy to lower tax rates was based precisely on the assumption that it would ensure, through better compliance, higher tax revenues. That assumption has proved to be correct, though the critics refrain from acknowledging it…”

Detailed study.

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Printable version | Mar 28, 2020 6:53:58 PM | https://www.thehindu.com/business/Economy/lsquoDeclinersquo-in-tax-GDP-ratio/article16371964.ece

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