Structural Weakness

Context: India needs to overhaul the tax system.

Improving taxation trends:

• Gross tax collection grew 0.73% in 2020-21, surpassing the revised estimate by Rs 1.24 trillion. Better than expected revenue collection also resulted in a lower than projected fiscal deficit.
• The Union government’s tax collection as a percentage of gross domestic product (GDP) improved to 10.25%, compared to 9.88% in the previous year.

Issues with the Indian tax regime:

• Regressive in nature: Overall improvement in tax collection was largely on account of higher duty on petroleum products, where the levy is in the form of a cess, which is not shared with states.
  • Excise duty collection went up by over 60% during the year.
  • Higher indirect tax collection also pushed its share in the total collection to 5.46% of GDP, compared to direct tax collection at 4.79%.
  • Personal income tax collection remains low because of a number of exemptions and inadequate tracking of activity in the unorganised sector.
• Inherent inefficiencies in India’s tax system and inability to generate revenues:
  • The goods and services tax (GST) rates, for instance, are not revenue-neutral. As a result, the general government is losing revenue worth over 1% of GDP.
  • At a broader level, India is not collecting high indirect taxes compared to other countries. Taxes on goods and services amount to about 11% of GDP in Organisation for Economic Co-operation and Development (OECD) countries.
  • As the Fifteenth Finance Commission has shown, India’s general government resource mobilisation — including tax and non-tax revenue — is at about 20 % of GDP, compared to an average of over 27 % in emerging markets and over 36% in advanced economies.

Conclusion: Inadequate tax collection will affect the government’s ability to push productive investment to support growth and ease public debt. Thus, the government urgently needs to rationalise indirect tax rates and revamp the direct tax system.