India needs to shift the taxation focus from 'Rates' to 'Revenues' to become a developed economy with a USD 25 trillion gross domestic product (GDP) by 2047, according to the experts at the Think Change Forum roundtable on accelerating the country's growth.
Industry experts noted that India can reduce taxes, maintain a low tax-to-GDP ratio and still collect robust taxes because of its large population. The informal economy needs to become part of the tax net to enable the transition from being a large economy to a developed economy which as per Think Change Forum estimates lies in the range of 30 to 35 per cent.
The emphasis on the need for a new taxation ideology during the discussion to make the transition from rates to revenue focused on lowering tax rates, enlarging the tax-paying base and thereby creating the means for financing India’s investment and development needs.
Sudhir Kapadia, Senior Partner, EY India said, “Conventional higher tax rates haven’t resulted in significant tax buoyancy. Recognising this fact, governments in India since 1991 onwards have clearly batted for moderate tax rates leading to greater levels of transparency and compliance. Going forward, it needs to be seen how much fiscal space governments will have to further lower tax rates from current levels. This is especially so as demands on government spending especially in physical and social infrastructure continue unabated to enable meeting high economic growth targets. This is the delicate balancing act which governments will have to grapple with."
Kapadia added that the time has come to bite the bullet for reforms in direct taxes. There could be one simplified rate structure for businesses and for individuals, there could be one simple three rate structure with low/moderate rates, no surcharges and cesses and no significant deductions.
“On GST, a lot has been spoken about the rates and it is time to have a far lower number of rates in GST structure. It is also time to ensure we do not have constraints related to availing of input tax credits. There has been a steady increase in income tax revenues but we need to have continued focus on taxpayer experience with tax administration and ensure the filing process remains seamless and hassle-free,” Sudhir Kapadia added.
The discussion in the event made a case for a wider tax base leading to more revenue collections. Under GST, taxpayers increased from 60 lakh in 2017 to 1.40 crore in 2023 with over 114 crore returns reported to be filed till June 2023. This depicts that a wider tax base leads to more collection.
Experts suggested a few reforms to accelerate India’s financial position and strengthen its ability which will act as a force multiplier to the new taxation ideology of reducing taxes and enhancing the base. Implementing pro-growth and investment policies aimed at fostering higher income and consumption levels is critical for sustainable economic development. Such policies involve initiatives to stimulate investment, encourage entrepreneurship and promote innovation across various sectors of the economy.
Experts noted that streamlining the law and reduction of slabs to simplify compliance is a crucial step towards achieving the objective of higher tax revenue. By simplifying GST regulations, businesses can navigate the tax system more effectively, reducing administrative burdens and promoting compliance
Unclogging the cases pending at the CIT(Appeals) level is important, given that over 5 lakh cases, amounting to INR 14.2 trillion as of 31 March 2022, remain unresolved. Simplifying laws and compliance processes can expedite the resolution of these disputes, facilitating the release of blocked funds and fostering a more efficient and equitable tax system.
Kaushik Dutta, Co-founding Director, Thought Arbitrage Research Institute said, “Though GST has brought significant improvements in our taxation system, in penetration, total collection, buoyancy, reduction of time in movement through e way bills, high use of technology etc. but several issues persist to make it a truly world class tax mechanism including multiple rates and operational challenges like businesses needing to register across states, posing logistical hurdles."
Dutta mentioned that illicit markets further exacerbate these challenges by causing substantial revenue losses for the government due to unreported transactions and tax evasion. This not only distorts market prices but also harms compliant businesses. Tax to GDP ratio cannot significantly go up and that needs a big ideological change. India’s tax-to-GDP ratio suffers from the presence of a thriving informal sector, which still accounts for 30 to 35 per cent of the economy.
"A simplified GST regime will enable them to join the formal economy, take input tax credits, and become competitive. Tax evasion continues to be a big challenge along with classification issues. The inverted duty structure is also an impediment. Another area that GST has not been able to crack is e-commerce. So, there are challenges and they need to be addressed,” Dutta added.
Ranganath Tannir, General Secretary, Think Change Forum said, “Given the emerging position of India in the world order, all stakeholders must work towards one single goal – to make India a developed country by 2047. We need bold decisions and fresh ideas to make this happen, such as reforming our taxation ideology to lower tax rates and increasing the base of taxpayers, without focusing on improving the tax-GDP ratio. Such restructuring will encourage more business activities and individuals to contribute and join the formal economy.”
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