Itsy Bitsy Teenie Weenie Tax
Once tax compliance improves, the rest of the pieces of the economy and democracy will fall into place
The Economic Survey 2017 opens with eight interesting facts about India. The one that caught specific attention is that “India has seven taxpayers for every 100 voters, ranking us 13th among 18 of our democratic G-20 peers”.
No doubt the statistic that the country’s tax-to-GDP ratio is low compared with the rest of the world, is well known. Now, we know why taxpayer concerns are still not such a major agenda with our parliamentarians, given that 93% of their constituency of voters do not constitute taxpayers. And possibly why we witness lack of taxpayer services. Equally interesting in the findings of the Survey are three other facts on taxation.
Well-Oiled Excise Duty
Firstly, the Survey states that the most notable feature on revenue collection has been the overperformance (even relative to Budget estimates) of excise duties based on buoyant petroleum consumption. More broadly, tax collections from petroleum sector have held up to a greater extent than expected possibly due to payment of dues being in demonetised notes. Most analysts expected that the Inco- me Disclosure Scheme would help meet the tax targets. However, the indication from the Survey shows that the increasing levy on low oil prices has bailed out the exchequer.
This was an outcome of a conscious policy decision. When oil prices started declining, India increased the excise duty on branded petrol and diesel — the increase in petrol tax has been over 150% in India. In contrast, governments of most advanced countries have simply passed on the benefits to consumers, such as UK having reduced taxes by 28.8%. Therefore, neither the expanded tax rules for corporate India nor the amendments in service tax have contributed as materially as the simple levy of excise duties on petroleum products.
This brings us to the next interesting observation: the government’s decision to impose taxes on petroleum products leads India to an implied carbon tax; India moved from a regime of carbon subsidy to one that imposedcarbontaxonpetroleumproducts at about $150 per tonne, which is six times greater than the internationally recommended standard. India is one of the few countries to also impose a tax on coal, which doubled in 2016-17 to .₹ 400 per tonne. Tax policy in India is certainly contributing materially to green action as reflected in the various projects and programmes now funded via the dedicated cesses or via the central allocations.
The third interesting dimension is that tax on black money is cited as the first and foremost benefit from the recent demonetisation. The Survey holds that income-tax collections have risen due to increased disclo- sure. Added to this, payments to local bodies and discoms also rose as demonetised notes remained legal tender for tax payments/clearance of arrears, including local taxes.
The Survey has also captured an eye-popping statistic on property tax. It says that evidence from satellite data shows that Bengaluru and Jaipur collect only 5-20% of their potential property taxes.
In the Long Run, More Tax
Over the long run, the Survey estimates that tax collection should increase as formalisation expands and compliance improves. Wisely, the Survey also notes that tax arbitrariness and harassment could impact credibility. The message is clear that the demonetisation can deliver long-term tax advantage via enhanced tax base, as long as the tax administration engages with the taxpayers with accountability and, hopefully, our tax rates moderate on a growing tax base.
The Survey does not discuss what could have been the impact on tax collection had a (second) income disclosure scheme been announced along- side the decision on demonetisation on November 8, 2016. It talks of the substantial loss on “conversion fees” that was incurred by black money holders. This could well have been captured as taxes had an efficient income disclosure scheme been announced and implemented in parallel.
The Survey also acknowledges that with more foreign trade pacts, alongside GST-induced tax rationalisation and labour reforms, there could be considerable job creation. Already, the annual work-related migration is about nine million and our distinctive demographic dividend is yet to peak. This would mean an expanded taxpayer base in India.
Possible, in a decade or less, the first-mentioned interesting fact that India has only 7 taxpayers per100 voters could undergo a material change. Then, surely the voice of taxpayers would be heard, loud and clear, and their interests reflected meaningfully in our democratic decision-making.
The writer is leader (direct tax), and inputs by Puneet Gupta, associate director (direct tax), BMR & Associates
This would just about cover everything