If there is one defining feature of the National Democratic Alliance (NDA) government’s macroeconomic management, it is its obsession with increasing tax revenue. Two of its most defining policy moves —demonetization and the implementation of the goods and services tax (GST)—were launched partly with that objective in mind. Yet, with just a few months left before it completes its five-year tenure, success on this front has been elusive with the NDA government not faring much better than its predecessors when it comes to raising tax revenue.
Data sourced from the ministry of finance and the Centre for Monitoring Indian Economy shows that growth in the centre’s gross tax revenue fell to the lowest in three years in 2017-18, taking the average growth under the first four years of NDA down to 14.4%, only slightly above 13.7% during United Progressive Alliance-II (UPA-II) and sharply below 19.3% during UPA-I.
Surprisingly, of the last four years for which comparable data is available, rise in number of taxpayers was the lowest in financial year (FY) 2016-17, the year of demonetization.
Taxpayers refer to those who filed a return of income in the corresponding assessment year of 2017-18 or those for whom tax was deducted at source in financial year 2016-17 but who did not file the return of income.
On one tax-related metric, this government has indeed done well: the tax-gross domestic product (GDP) ratio. Compared to 16.5% under UPA-II and 16.4% under UPA-I, the tax-to-GDP ratio averaged higher at 17.2% in the first four years of NDA, rising to a record 18% in 2017-18.
However, this is partly the result of a slowdown in nominal GDP growth. It is the tax-GDP ratio that the finance minister Arun Jaitley in his 2017 budget speech referred to, while decrying the low level of tax compliance in the country. As a Mint analysis of tax-GDP ratios across the world showed, among emerging markets and large democracies of the developing world, India is not really an outlier in terms of the tax-GDP ratio. When compared with economies at a similar stage of development, India’s tax-GDP ratio has been respectable.
The obsession with raising taxes and the tax-GDP ratio has meant a rampaging tax bureaucracy has become more and more obsessed with attaining ever-elusive targets, with moves to tax angel investors drawing flak from even within the government.
The lack of transparency in tax administration and the setting of unrealistic revenue targets have meant that complaints of ‘tax-terrorism’ have resurfaced in the term of this government as well. According to a 2017 CAG audit report, the income tax department had raised exaggerated demands to achieve its revenue collection targets by resorting to “irregular" and “unwarranted" methods. The demands so collected were refunded in the next financial year along with interest which eventually put a heavy burden on the exchequer. The report highlighted that the amount locked up in such appeals at tribunals, high courts and the Supreme Court increased from ₹3 trillion in 2015-16 to ₹4.4 trillion in 2016-17. The report also noted that an overwhelming majority of the cases in tribunals and courts are decided in favour of the assessees.
For a government which rode to power promising tax reforms, the actual record has been disappointing.