Is India an outlier when it comes to tax-GDP ratio?
Mumbai/New Delhi: Of late, several economists and policymakers have drawn attention to India’s low share of tax revenues as a proportion of the gross domestic product (GDP) of the Indian economy. The realization, or rather the belief, that India’s tax-GDP ratio is low has also spurred frenetic efforts to mobilize ever-greater tax revenues.
But is India really an outlier when it comes to the tax-GDP ratio? A Mint analysis of tax revenue data for a large set of economies, culled from a wide range of sources, suggests that India’s tax-GDP ratio does not appear low when compared to other developing countries or emerging markets.
At first glance, the data on tax revenues does suggest that India’s tax-GDP ratio is indeed lower when compared to other major economies (those with GDP above $100 billion as of 2017).
However, most of these economies are far richer than the Indian economy today. When we compare these economies at a similar stage of development as India, India’s tax-GDP ratio appears quite respectable, as India is somewhere in the middle of the pack when judged by this yardstick.
This also becomes clear when we consider only large developing economies (those with GDP above $50 billion as of 2017) in the analysis. Among these economies, India does not appear to be an outlier at all. As the charts below show, India’s tax-GDP ratio is slightly above the line of best fit (the line of best fit shows the mean trend in a scatter-plot), suggesting that India’s tax collections are slightly above average, given the average income of the country.
Some economists suggest that democracies are susceptible to greater redistributive pressures, and hence, any analysis of tax-GDP ratios should account for that. But our conclusion about India’s tax-GDP ratio does not change even if we include just democracies in this analysis.
Even when we consider collection of direct taxes within the country, there seems to be a broad correspondence between levels of per capita income and per capita tax collections. As the chart below shows, the richest states of the country—Delhi and Maharashtra—lead the league tables in terms of tax collection.
Some of the states with the lowest per capita incomes—such as Bihar and Uttar Pradesh—tend to contribute lower amounts of direct taxes (in per capita terms).
The overall weight of the evidence seems to suggest that India’s tax collection efforts have not been very poor. The fault does not lie in our stars, but in our low income levels.
Thus, the most potent solution for raising India’s tax-GDP ratio is to raise economic growth and average incomes. India’s recent economic history also bears testimony to this finding. As the chart below shows, tax-GDP ratio of the country rose the fastest during the boom years of 2002-08.
Most of the increase came in the form of higher corporate taxes, which went directly to the central kitty and hence, did not raise own-tax revenues of state governments. Nonetheless, corporate taxes do add to the divisible pool of central taxes, which is shared with states.
The rise in corporate tax collections is in part a reward of earlier reform measures aimed at liberalizing the economy and promoting growth, as an earlier Mint article had pointed out.
As a result, compared to other countries, India’s corporate tax collections appear quite healthy even today.
When it comes to personal taxes though, India does appear to be somewhat of an outlier. So is the case when it comes to property taxes. Yet, as the above chart shows, India’s collection of personal income taxes is quite similar to that of Indonesia, an economy that is richer than ours. And our collection of property taxes is similar to that of Germany, a country far richer than ours.
The idea that India is a nation of tax-evaders is a myth, our analysis shows. This is not to deny that there are no such evaders. But compared to countries at a similar stage of economic development as India, the extent of tax evasion in the country may be no more, or no less, than the average.
To be sure, this does not mean that our tax system is perfect, as it stands today. There are indeed distortions and inequities hidden in this system, and the second part of this series will deal with those issues. Nonetheless, the broad lesson from this analysis is that the government needs to go easy in its tax-mobilization efforts, and rein in the taxmen. It would do well to focus more on raising economic growth than on raising tax revenues.
This is the first part of a two-part data series on India’s tax system.