How much tax can you squeeze out of Indians? Some international comparisons help with the answer. India’s tax-to-GDP ratio is 15 per cent (of which the Centre’s share is 10 per cent). Before the financial crisis of 2008, it was 17.7 per cent (of which 12 per cent was central taxes). Compare that with the ratio in other countries. Among economies that are poorer than India, Bangladesh has a tax-to-GDP ratio of just 8.5 per cent, and Pakistan 10.2 per cent. Vietnam is at 15 per cent (these and other numbers have been compiled by the Heritage Foundation). As you go up the income ladder, the tax ratio climbs because it is non-subsistence incomes that are taxed. But even richer countries have lower or comparable tax ratios. Indonesia’s, for instance, is as low as 11 per cent, and the Philippines’ at 14.4 per cent. A much wealthier country like Malaysia has a ratio of 15.5 per cent, while Thailand is at 17 per cent. All these members of the Association of Southeast Asian Nations have higher per capita incomes than India, so their capacity to bear a higher tax burden is naturally greater. China, with a per capita income that is more than three times India’s, and which is supposedly Communist, has a tax-GDP ratio of just 17 per cent. Looking at these countries and then at India’s tax ratio, it is clear that we are not an under-taxed nation.
The rich countries have tax ratios that go as high as 40 per cent of GDP and more — the Scandinavians and countries in Northern Europe are in this band. Many countries in South and East Europe are in the 30 per cent range. But semi-tax havens like Hong Kong and Singapore, both city states, are in the 15 per cent range. You have outliers too, poor countries with very high tax ratios, like Zimbabwe and Cuba, both of which are above 40 per cent; but you don’t know how accurate their GDP numbers are, and in any case no one wants to imitate them. Looking at the list and its variations, you could say that India is doing well at its current stage of development and level of income.
A look at tax rates provides endorsement. There are many economies where the peak income tax rate is higher, but India’s 30 per cent is a good middle-of-the-road figure, especially in a country where the propensity to evade is still high. Corporate taxes in many countries are lower (which makes sense, since they are the engines of growth). Indirect tax rates too compare well with what India has (some have a higher VAT rate, others lower). The problem in India is not with rates; it is with coverage. Hence the familiar criticisms — only 35 million pay income tax, a service economy which accounts for more than half of GDP delivers less than one per cent of GDP as tax, and so on. Perhaps reduced evasion comes with the better systems associated with a higher order of development. More people come into the organised sector, and evasion becomes more difficult because transactions leave a trace. That automatically raises the tax-GDP ratio, without tax rates having to go up.
From that perspective, the most important way of getting more tax revenue is to introduce a comprehensive goods and services tax, which will plug many loopholes. The other way is to use information networks to detect evasion. For instance, nearly half of the income tax collection comes from just two per cent of taxpayers (715,000 people who report a taxable income of Rs 8 lakh or more). Yet, household surveys show that the number in that income bracket should be twice as large. If they could be traced, imagine what it would do to tax revenue.