Myth or fact: Panellists debate if India's tax base is too narrow

Is India’s tax base too narrow? While economist Surjit Bhalla believes it’s a myth, Arbind Modi, who chaired the Direct Tax Code panel, believes it’s a fact.

Both were speaking at a seminar titled "Is India's Tax-to-GDP Ratio Too High or Too Low?" organised by the Delhi-based think tank Centre for Social and Economic Progress (CSEP).

Bhalla, who was India’s executive director at the International Monetary Fund, argued that the belief that only 1-2 per cent of the population pays taxes is unfounded. He said 20 per cent of the “working” population in India is paying taxes, not just 1-2 per cent. “You can’t take population as a measure,” he emphasised.

Countering Bhalla’s claim, Modi, who was a member of the Central Board of Direct Taxes (CBDT), said that it is, in fact, low. He pointed out that India has only 80 million filers, of which 5 million are non-taxpayers who file taxes only because the law requires them to. “It’s not a myth that the tax base is too low in India; it’s a fact,” Modi added.

Bhalla said that the claim that tax cuts don’t work is the “second myth” about the Indian economy. He argued that tax cuts are effective, citing the example of corporate tax reductions. India cut corporate taxes from 30 per cent to 22 per cent in 2019, among the largest cuts in global history.

According to Bhalla, the reason for the lack of immediate impact in the first two years was the COVID-19 pandemic, which began in 2020.

Bhalla noted that after the tax cuts, corporate taxes saw a significant increase, with corporate tax revenue adjusted for dividends rising from 2.52 per cent of GDP in 2020 to 3.12 per cent of GDP in 2023.

Responding to Bhalla’s claim, Modi said that corporate tax cuts led to a significant positive change, stating that the government only reduced taxes to a level that is "neither here nor there." He argued that further cuts were necessary, as the global average corporate tax rate is around 20 per cent, while India's rate remains at 25 per cent.

“From 30 per cent, we have only come to 25 per cent. You have full taxation of dividends, so the cumulative is some 44-45 per cent. With 44-45 per cent, your IRR (Internal Rate of Return) will never work. For an investor, while calculating his IRR, it is both that he will count,” Modi said.

According to Modi, the tax cuts didn’t achieve their intended effect, as India’s corporate tax revenue should have reached 4 per cent of GDP, but it has only risen to around 3.1 per cent of GDP.

Bhalla also discussed India's tax-to-GDP ratio, noting that, despite being a developing country, India's tax revenue stands at 19 per cent, which is higher than expected. He pointed out that middle-income and rapidly growing economies typically have much lower tax-to-GDP ratios. "Tax collections are very high in India. We tax too much," he remarked.

He sought to debunk the popularly held belief that India’s Investment to GDP ratio has gone lower in comparison to the peak of 2004-11. He said that the Investment to GDP ratio of 29-30 per cent is being measured in nominal terms.

Bhalla said the price of investment goods is much lower than the GDP deflator. “Therefore, we need to aggregate the investment, and deflate it by the price of investment goods with the denominator being the real GDP. In contrast, the real investment ratio is 34-36 per cent, which is comparable to the peak of 2004-2011,” he added.