The Organisation for Economic Co-operation and Development (OECD) recently released the Economic Survey of India for the year 2017. The report notes that the World Bank's Doing Business, 2017 survey places India at a low rank of 172 out of 190 countries on the ease of paying taxes. The report largely appreciates the reforms undertaken by India in the previous financial year such as passing the much-awaited Goods and Services Tax (GST) Bill, liberalisation of the Foreign Direct Investment (FDI) regime, reconstruction of the Bankruptcy Laws, removal of specific tax reliefs and increased use of e-governance.
The report also lauds the decision of demonetisating high-denomination currency notes and states that while it will result in transitory and short-term costs, the benefits will be seen in the long run. The shift towards a less cash economy will improve financing of the economy, availability of loans (as a result of the shift from cash to bank deposits) and promote tax compliance.
The key observations and recommendations of the OECD on the taxation matters in India are:
- India's tax revenue as a percentage of the GDP is the
lowest among BRICS nations and is quite low compared to the OECD
- India's overall tax revenue is 16.8% of GDP, whereas other BRICS Nations stand at Brazil 33.4%, Russia 28.2%, China 24.8% and South Africa 27.8%.
- OECD average is 34.2% of GDP.
- The Personal Income Tax (PIT) revenue is low and has a limited
redistributive impact. In support of this finding, the report
quotes the following statistics:
- The survey indicates that PIT contributes merely 2.20% to the GDP in India, whereas the average contribution of the OECD members is approximately 9%.
- Only 5.6% of the total population pays PIT due to a large zero rate tax bracket and exemption for agricultural income.
- The Hindu Undivided Family (HUF) category of taxpayers offers those with substantial property income an avenue to reduce their tax liabilities and complicates implementation of inheritance tax.
- The liabilities for the 'well-off' are reduced through deductions for principal and interest repayments for housing loans.
- India's corporate tax rate, coupled with tax on dividends results in high tax liability as compared to international standards and proves to be a major obstacle for business development and attracting foreign investment.
- The number of tax disputes is extensive, and about 40% of the total go through the Court system.
The report states that while the tax-to-GDP ratio is low, meeting social and development needs will require raising more revenue from property and personal income taxes. Since few people pay income taxes and property taxes, the tax system has little redistributive impact. The report makes certain significant recommendations to improve the tax to GDP ratio, as under:
- The distribution dividend tax should be replaced by a traditional withholding tax system.
- Non-resident tax rates should be aligned with tax rates applicable to Indian residents.
- Inheritance tax should be introduced with a relatively high exemption threshold and low rates.
- Tax compliance should be incentivised (e.g. by securing access to services such as life insurance to those filing a tax return).
- Agricultural income of rich farmers should be subject to tax. This will also assist in reducing the possibility of tax evasion through categorisation of non-agricultural income as agricultural income.
- The income thresholds and tax rate structure should be brought in line with other emerging economies so that taxes paid at higher rates start kicking in at a lower income level.
- Most tax expenditures/exemptions should be eliminated as this benefit mostly the rich and high-income individuals.
- Audit process should be improved to reduce the number and length of tax disputes.
- The number of employees in the tax function and their training should be improved.
India is on course to implement many of the recommendations specified by the report. For example, the government has phased out most of the tax deductions and exemptions and has laid out the outer limit regarding the date up to which such deductions/exemptions can be claimed.
It has reduced the number of revenue audits and now relies more on the self-declaration. Most of the tax filings and processing returns have become online. The government has also introduced e-revenue audit procedure whereby notices for revenue audits are received online, and the responses are also required to be filed online without any interaction with the revenue personnel. The revenue officers are trained to treat the taxpayers better and are also discouraged from undertaking frivolous litigations.
The government is collecting the data regarding cash deposits made by various persons and the expenditure incurred by them on luxury items to bring more people under the tax net. It has set an ambitious target of increasing the number of taxpayers to 100 million. As we can see, a lot of effort is being been put in by the Indian government to achieve the objective of improving tax-to-GDP and PIT to GDP. However, a lot still needs to be done, but with the earnest intent of the government, it is possible to achieve this.
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