The tax base is growing – government shouldn’t waste the opportunity

Source: The post is based on the article “The tax base is growing – government shouldn’t waste the opportunity” published in “The Indian express” on 6th September 2023.

Syllabus: GS3- Indian economy- Mobilization of resources

News: The author discusses the growth in India’s tax base, with more individuals and companies paying taxes, even during slow economic growth. However, despite the increased tax base, the tax to GDP ratio remains stable due to tax rate reductions and other policy decisions, leaving the government with limited additional revenue for its development goals.

What are the reasons for the growth in India’s tax base?

Direct Taxpayer Growth: Companies paying tax surged by 43% from 7.46 lakh in 2014-15 to 10.7 lakh in 2022-23. Individual taxpayers saw a 65% jump from 5.38 crore to 8.9 crore.

Small Taxpayer Inclusion: A significant portion of new taxpayers earn under Rs 5 lakh, making them an essential segment of the expanding tax base.

GST’s Appeal: Active GST payers increased from 1.2 crore in 2019 to 1.4 crore by 2023. The benefits of GST registration, like input tax credits, may have driven more businesses to pay direct taxes.

Formalization of Firms: Approximately 22% of Indian firms are now formally engaged in tax-paying activities.

Economic Expansion & Formalization: The growth in the tax base can be attributed to the economy’s growth. The formalization of the economy has made tax evasion tougher.

Diverse Taxpayer Profile: Not all taxpayers are active in the workforce. Retirees and those earning from interests or rentals also contribute, suggesting a broadened tax base beyond just the active labor force.

What are the challenges still present in India’s tax system?

Lower Tax Revenues: Despite a broader tax base, the government has limited room to spend due to constrained tax revenues.

Stable Tax to GDP Ratio: The growth in the number of taxpayers hasn’t translated into a proportionate increase in the tax to GDP ratio.

Impact of Tax Cuts: The corporate tax rate was cut from 30% to 22%. The resulting revenue loss was Rs 1.28 lakh crore in 2019-20 and Rs 1 lakh crore in 2020-21. The corporate tax to GDP ratio fell from 3.5% in 2018-19 to 3.1% in 2022-23.

Rise in Zero-Tax Individuals: The number of individuals with zero tax liability grew from 2.9 crore in 2019-20 to 5.16 crore in 2022-23. The recent increase in the rebate limit to Rs 7 lakh might further this trend.

Reduced GST Rates: The weighted average GST rate fell from 14.4% during its introduction to 11.6% in 2019 due to tax cuts in 2017 and 2018.