Transcript Slide 1

Political Economy of Tax Regime:
India
8 August, 2010
Saumen Chattopadhyay
JNU, India
Introduction
• Political economy of tax regimes (Theme 1)
• Who are the major formal and informal lobbies and
what are their political and economic interests?
• What is the extent and nature of their influence over
policy formulation and implementation?
• What are the key political factors affecting the makeup
of earmarked revenue and general budgetary support?
• What are the key political factors affecting the policies
and institutional arrangements for fiscal federalism and
decentralization?
• What is the impact of the above on historical and
current reform efforts?
Some Issues
• Designing of a tax policy is determined not only by the application of the
economic theory but also how the ruling party wants to use economic
theory in the context of a socio-economic situation. It is after all a political
decision.
• Tax administration is as important as tax policy and the failure of tax
administration is symptomatic of an absence of a strong political will.
• Tax-GDP ratio in India is low. Tax payers were merely 1% population while
we embarked on economic reform in 1991, it is nearly 3% now. Of course,
agricultural income is not taxable.
• India ranks 128th in the world in terms of per capita income (Economic
Survey 2009-10) and 134th in terms of HDI with nearly 35 percent living
below the poverty line. Sengupta to Commission on the Unorganized
Sector showed that 3/4th of our population is poor and vulnerable. 77%
consume less than Rs 20/- per day in 2003-04.
The Political Economy of tax policy
making
• The Ministry before the budget presentation does meet the
Industrial groups/various representations, chambers of commerce
and all sections of the people.
• Free press, democracy and invoking theory ensure that the tax
policy is not altogether hijacked by any lobby/class, but tweaking
the tax policy/provisions to benefit a particular lobby or a section is
quite common as it is done in the name removal of anomalies.
• For income tax reform, the approach is to foster voluntary tax
compliance through a reduction in the tax rate, expansion of tax
base and strengthening of the tax information network (TIN)
through computerisation.
• Cooperation from all the states to facilitate indirect tax reform is
being solicited by the Centre.
Tax-GDP ratio: central taxes
Table 1: Major Central Taxes as percentages of GDP
Gross Tax
CIT
PIT
Customs
Excise
1990-91
10.12
0.94
0.95
1991-92
10.31
1.20
1.03
1992-93
9.97
1.19
1.05
1993-94
8.82
1.17
1.06
1994-95
9.11
1.36
1.19
1995-96
9.36
1.39
1.31
1996-97
9.41
1.36
1.33
1997-98
9.14
1.31
1.12
1998-99
8.26
1.41
1.16
1999-00
8.87
1.58
1.32
2000-01
8.97
1.70
1.51
2001-02
8.21
1.61
1.40
2002-03
8.81
1.88
1.50
2003-04
9.23
2.31
1.50
2004-05
9.41
2.55
1.52
2005-06
9.88
2.73
1.51
2006-07
11.05
3.37
1.75
2007-08
11.99
3.90
2.07
2008-09
10.86
3.83
1.90
2009-10 RE
10.27
4.14
2.03
2010-11 BE
10.77
4.35
1.74
Source: Union Budget, various issues and NAS.
3.63
3.41
3.18
2.58
2.65
3.01
3.13
2.64
2.34
2.50
2.26
1.77
1.83
1.77
1.78
1.76
2.02
2.10
1.79
1.37
1.66
4.31
4.30
4.12
3.69
3.69
3.38
3.29
3.15
3.06
3.20
3.26
3.18
3.35
3.30
3.06
3.00
2.75
2.50
1.95
1.65
1.90
Service
0.04
0.07
0.08
0.10
0.11
0.11
0.12
0.14
0.17
0.29
0.44
0.62
0.88
1.04
1.09
1.10
0.98
Effective tax rate: Corporate
Table: Profile of Sample companies across range of profits before taxes (financial
year 2007-08)
Profit Before
Number of Share in
Share in Share in Ratio of Effective
Taxes
companies profits
total
total
total
Tax Rate
before
income
CIT
income (in %)
taxes (in
(in %)
payable to PBT
%)
(in %)
(in %)
1 Less than zero 132356
0.00
0.58
0.36
2 Zero
24529
0.00
3.27
1.39
3 Rs 0-1 crore
188584
3.17
3.78
3.56
79.95
25.52
4 Rs 1-10 crore
16596
7.47
7.55
7.87
67.88
23.99
5 Rs 10-50 crore 2907
9.32
8.51
9.14
61.37
22.35
6 Rs 50-100
531
5.51
4.98
5.37
60.75
22.21
crore
7 Rs 100-500
551
16.99
15.50
16.60
61.29
22.26
crore
8 Greater than
179
57.54
55.83
55.71
65.18
22.05
Rs 500 crore
9 All Sample
366233
100.00
100.00
100.00
67.17
22.78
companies
Note: the sample size is 366233; Rs 1 crore = Rs 10 million
Source: Receipts Budget 2010-11, table 1, Annexure 12.
Tax Expenditure
Table : Tax Expenditures: Revenue Foregone
2005–06
In Rs crore
% of total
tax
9.45
3.70
18.23
34.88
66.72
10.27
% of own
tax
34.18
21.30
60.02
196.31
…
2009–10
In Rs crore % of total tax
% of own
tax
31.2
32.7
167.4
294.8
CIT
79554
12.06
34618
PIT
40929
6.48
13550
Excise
170765
27.04
66760
Customs
249021
39.43
127730
Total
540269
85.56
244290
Less Export
37970
6.01
37590
credit related
Grand Total
56.45
502299
79.54
206700
Source: Receipts Budget 2008–09, Table 11, page 58, Union Budget 2008–09, GoI and Receipts Budget
2010-11, Table 12, page 57, Union Budget 2010-11.
Income Tax Revenue statistics-size
distribution
Range of income
(Rs. In ml)
1999-2000 (Assessment Year)
Numbers as a multiple of 1990-91
Number of returns
0.2 to 0.5
10.9
0.5 to 1
33.4
Over 1
49.9
Total: 13.8
Income of Returns (in Rs.)
0.2 to 0.5
9.6
0.5 to 1
31.9
Over 1
30.4
Total: 17.0
Tax Payable (in Rs.)
0.2 to 0.5
4.3
0.5 to 1
14.2
Over 1
14.3
Total: 8.0
Direct tax
• Tax expenditures as a percentage of tax collection
has been substantial because of a plethora of tax
concessions.
• The effective tax rate has gone down. More for
personal income tax.
• It may decline further with the possible introduction
of Direct Tax Code from April 2011.
• DTC seeks to reduce the effective tax rate, expand tax
base through withdrawal of tax concessions to foster
voluntary tax compliance.
Political Economy of DTC
• A further reduction in the personal income tax
is acceptable to the taxpayers (largely the
middle class), withdrawal of tax concessions is
unlikely to be so.
• Outcome may be a decline in the effective tax
burden and fiscal consolidation may suffer
(Rao and Rao, EPW, 2009).
• And the approach should be collect more from
direct tax as it is progressive, less distortionary
and non-inflationary.
Has tax compliance improved?
•
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•
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•
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Focus has been to foster voluntary compliance. To be effective costs of noncompliance has to be made greater than its benefits.
We need to distinguish between enforced compliance and voluntary compliance.
A rise in the collection is being attributed to a series of measures initiated like Tax
Information Network (TIN) based on Kelkar Committee recommendations, a
reduction in tax compliance costs through e-filing, tax payer services and a
reduction in effective tax rate to induce. TDS has contributed to as well (Rao and
Rao 2005).
The nature of growth is also responsible.
The true tax base for income has witnessed a faster growth than GDP so the
buoyancy estimated with respect to GDP would be actually lower with respect to
the true base.
The inequity among the tax payers has risen sharply (because of a surge in the
income of the IT professionals and income of skilled workers in the corporate
sector) (Kumar, Chattopadhyay and Dharan, Alternative Economic Survey, 2005).
Tax administration: Extent of tax
evasion
• NIPFP (1985): Report on the Black Economy found nearly 20% of income
was black income for 1980-81
• Kumar (1999) observed that tax evaded income would amount to 40% of
GDP for 1995-96 (ignoring bribes and double counting) with only 8% being
in the illegal sector. This is based on corrected NIPFP study. Indirect tax
evasion leads to direct tax evasion.
• Kumar argued that failure of tax administration to curb evasion could
persist because of a nexus between the bureaucracy, the political masters
and the business class.
• Despite pro-market reform, the number of fraud and scam has not really
gone down. Got nothing to do with tax rates.
• Das-Gupta and Chattopadhyay (NIPFP, 2001) role of tax consultants in
facilitating tax evasion was found to be significant. Even the salaried with
TDS resorted to tax evasion. Common among the corporate sector.
• Kumar, Nagar and Samanta, NIPFP study (2007) argued that volunatry
compliance is not more than 50% in IT and CIT.
Indirect Tax reform: GST
• The overall approach is to move towards
consumption based taxation as evident in the
implementation of the Goods and Services Tax (GST)
in a nation of 29 states.
• Excise levied by the centre, VAT by the states and
services tax all combined into one to create a
common market at the country level.
• Implementation is a highly political issue. How to
reconcile fiscal autonomy of the states with a near
perfect design with low compliance costs.
Tax compliance cost: GST
• Implementation of GST: major challenge is to arrive at a consensus
both with regard to designing and implementation. Some states are
opposing as fiscal autonomy is argued to have been curbed.
• Reduction in the tax compliance costs of GST has become a major
issue in the federal set up. As such the states particularly those
which are ruled by the opposition parties do not want to forego
their discretion over taxation of goods and services.
• While there is a consensus emerging at the initiative of the Ministry
with regard to tax structure, the challenge is now to reduce the
compliance costs without denting the federal set up.
• Multiple rates may lead to lobbying and serve vested interests
without any substantial impact on equity. Difference in tax rates on
inputs and outputs need not be there (Rao, 2009).
Concluding remarks
While political influence on tax administration has become less with
reform, the insulation from the political masters cannot be fully
guaranteed.
In a country with acute income disparities, the need is to carry on with
the process of building up of the TIN but the concept of voluntary
compliance is questionable.
A stronger tax admin with reasonable rates of tax rates on income on
the class who can afford to pay (the growing middle class).
The recurrence of scams and frauds are not affected by tax rates but it
affects tax collection and service delivery. Political masters need to
be more proactive
Given IDT reform, the focus should be to collect more from DT instead
of appeasing the middle class. Disparity has increased and not
compliance from 2000-01 (AES).