Tax-to-GDP ratio represents the size of a country’s tax kitty relative to its GDP. It indicates the size of the government’s tax revenue expressed as a percentage of the GDP. A higher tax to GDP ratio means that the government is able to cast its fiscal net wide. It reduces a government’s dependence on borrowings but in the contrast of this theory the outstanding debt of the central government crossed ₹100 lakh crore for the first time at the end of June 2020. A quarterly report by the Department of Economic Affairs showed that total liabilities increased to ₹101.3 lakh crore from ₹94.6 lakh crore as of end-March.
Tax to GDP ratio is the barometer to judge that country’s tax buoyancy is strong as the share of tax revenue rises in sync with the rise in the country’s GDP.
India’s gross tax-to-GDP ratio is around 11% which is far below the average of around 34% of OECD countries.
India’s tax to DGP ratio is almost stagnant and falls between 10% to 11% since last 5-6 years despite aggressive approach of the Indian Government to increase the same. In India, Direct tax contribute around 55% of total tax collection and residual 45% constitute indirect tax collection.
To increase the tax GDP ratio, Government’s main focus was on increase the number of tax payer in direct tax and introduction of GST in Indirect tax.
Efforts of the government had not yielded expected results both on direct tax and indirect tax. Though Number of income tax return filers increased almost two fold from 3.3 crore to 6.5 crore and income tax collection has also increased from 6.38 crore to 11.50 crore from FY 2013-14 to FY 2018-19 but direct tax to GDP ratio increased minuscule 5.62% to 5.98% in the same period. Collection from the indirect tax collection specially GST is far below the expected tax collection.
The above data shows that mere increase in the number of tax payer is not the right approach for increase the tax GDP ratio. Moreover now number cannot be increased in the same pace in coming years as we witnessed in last 5-6 years. It is a known fact that India is largely an agriculture-based country and Agriculture income is tax free. 40% population is still around poverty level. Huge portion of the population is under 18, students and senior citizen, which does not contribute to the exchequer. These factors exclude a large chunk of populations from tax net, most of remaining persons are filing their returns.
As we know that a large chunk of GDP constitutes agriculture and related operation which though comes in the calculation of GDP but no tax is being received from these activities whereas this is not the position with other OCED countries hence comparison of tax GDP ratio with other OCED countries is not the correct approach of comparison but still tax GDP ratio in India can be increased with various out of the box approaches. A few out of the box approaches are as under:
Though Income tax department had come out with a scheme “ Certificate of appreciation” under which three type of certificate is conferred to the tax payer through E mail. Basis of selection of category and tax payer is not made available to the general public but it is understanding that tax payer is selected on various grounds inclusive of quantum of tax and other compliance level. Though this scheme has been in vogue from last 3 years still general public is not aware about such scheme. It should be publicise heavily to induce the tax payer for better compliance.
These certificate should be attached with some public recognition so that people get motivation to pay tax honestly and diligently. These persons should be made guest of honour or chief guest in public programs organised by government at various level like state, district, taluka etc. For example, people who paid highest tax should be made guest of honour at state level or so on.
People who are paying tax honestly should be given preference at various places be at airport checking, Railway reservation, Highway toll booth etc.
A few name of public places in every city and infrastructure should be in the name of honest tax payer because they are the real warrior in nation building.
Prime minister, Chief Minister can have lunch or dinner with selective honest tax payers in a year.
High tax payer may be nominated as co-opted member in various government bodies, committee and local government bodies.
There may be hundreds of avenues and ways through which and honest tax payer can be rewarded and it should be publicise so that general public is induced to pay tax honestly.
The government should come out with social security scheme for tax payer. It is a general complaint of the tax payer that they are not getting anything from the government and their hard earned money is being wasted for various subsidies only. It is also a fact that government had come out with small social security scheme like Atal Pension Yojana, PM jan Surksha Beema Yojana etc for the lower class or lower middle income group of the society but there is no such temptation for the middle class or higher class of the society which deduced them to pay higher tax which will eventually benefit them in their retirement age. We also witnessed various incidents wherein old age persons faced precarious financial position despite the fact that they have earned handsome amount in their young age but in absence of social security scheme those persons find it very difficult in their old age. Social security scheme after super annulation age will also address the social abuse wherein elderly people feel isolated and treated badly as they does not have financial power.
Government may come out with a scheme wherein every tax payer will be allotted a specific account like PPF where a portion of their tax payment will be credited by the Government and nominal interest is also given every year at credit balance. Tax Payer may be restricted to withdraw this amount before the age of sixty year or specific age. Tax payer may be given an option to withdraw the same in lump sum or as a pension after a specific age. Legal heir may be entitled to withdraw the amount if the tax payer is expired before retirement age. It will not be a burdensome to the government also because people will pay higher tax and better compliance in hope of part return of the money. Higher tax mop up will reduce the dependency on the borrowing. It is expected that once scheme is formulated than tax revenue will increase substantially.
Introduction of such a scheme will boost the confidence of the tax payer in the system and will tempt them for voluntary payment of high tax considering the high penalty for evasion. This scheme may be a game changer as most of person are law abiding citizen and follow the rule of the land and such an unprecedented scheme shall work like enzyme for them.
Implementation of such a scheme is now possible due to technology advancement. There will be no much financial burden on the government even in the initial year and government will earn even high revenue after a short period on better compliance. This will also addresse the high tax rate gap between corporate and non corporate as the scheme may be made applicable to individual tax payer only.
As of now no such scheme is in vogue in the world wherein people will get social security scheme benefit direct in proportion to their tax payment. It is hope that once such scheme is announced, India may find its place in the league of tax compliant nation within a short period.
GST revenue of the government is not in sync with the expectation and business volume despite various restriction and procedure adopted by the government. Such unnecessary procedure is also destroying the theory of ease of doing business. As we know that GST evasion start from the last layer of the society. If government want to block the GST evasion than they should come out with such a scheme wherein retailers had been left with no option other than to comply the provision. It is of open secret that evasion start from the retailer wherein they sold to ultimate consumer and in absence of scheme to check their sales various retailers evade their sales and also purchase corresponding material from wholesalers out of the books and this chain is escalated up to manufacture which leads to the evasion of GST at massive level. As we know that GST is consumption based tax system wherein high tax revenue shall accrue to the state which have high consumption but one would be surprised to know that estimated Per Capita GST Collection of the state of Bihar for the year 2019-20 is below Rs 100/- per month compared to around Rs 600/- of national average. It is noticed that most of retailers had not yet taken GST registration and show their sales much below the threshold amount liable for registration. GST registered businessman in India is only around 1.30 crore which seems to be very low.
Government Should come out with a scheme wherein a portal or app is developed by the government and retail consumer is allowed to feed their purchase bill through their portal and app. Government should evolve a scheme wherein random retail bills can be cross verified with the sales of the retailer and like one. Retail consumer shall be encouraged to pay through banking channel and cash back be allowed to the retail consumer on monthly basis if they pay through online mode or banking channel. As we know that once the payment is made through banking channel, It will be very tough for a person to evade such sales.
There may be various other out of the box approaches which will increase the tax compliance. If these are implemented than Tax GDP ratio of India will reach to a respectable level.