MAY 01 , 2024

By Pratap Singh, Pr CIT

FOR any developing country like India, economic growth remains a major macroeconomic objective. World over, the Governments are saddled with the responsibility of providing public goods, like health, education, public transport and social welfare along with basic infrastructure for the citizens to improve their quality of life and overall well-being. Stabilization of the economy, redistribution of income, provision of economic services are some major responsibilities, a government owes its citizenry. The ability of government to live up to these responsibilities largely depends on the amount of resources generated by the government through various sources, internal and external, available to it. Taxation is one of the oldest means by which the cost of government is funded and is of great importance to any nation in its pursuit of self-reliance and in meeting its economic needs. Most importantly, taxation is a major source of government revenue, which are used to render their traditional functions such as: provision of good roads, maintenance of law and order, defence against external aggression, regulation of trade and business to ensure social and economic maintenance. Provision of these social services and infrastructure goes a long way in reducing the total cost of operation of a business. It means that businesses can expand their operations rather than striving to provide these services and infrastructures for themselves.

Taxes simply do not provide resources for development and for expanding social agenda of the government but they play a crucial role in stimulating savings, making investments and activities which promote development. They also impact consumption and spending patterns of individuals. Therefore, taxes play a seminal role towards development of a country.

The Government of every country requires resources for operating public institutions, developing the country's infrastructure and financing public welfare initiatives and schemes. In exchange for providing these amenities, a government generates the revenue required by taxing its citizens. To make this process efficient, every country must lay out a proper tax system to generate revenues. Taxation can also be used to influence or direct the consumption pattern of citizens. It can be used to encourage or discourage investment in certain sectors of the economy, which are harmful to the society. It can also be used to protect local and small businesses and reposition them to better compete with their bigger, foreign counterparts.

Taxation and tax incentives like tax holidays, among others, can attract foreign investors to a country. This gives investors the opportunity to fully recoup their investments during such periods as well as reinvest, in order to operate on a larger scale. This brings about economies of scale. Again, capital allowances provide businesses the opportunity to recover the amounts they spend in capital expenditure. All these will eventually result in an expanded economy and thus economic growth.

Notwithstanding the numerous roles taxation can play in the economic growth of a nation, it can also hinder economic growth by being inimical to economic activities. This occurs mostly in the form of high taxation, multiple taxation and double taxation. High taxation is when the government imposes too much tax on the profits of businesses or income of individuals. Multiple taxation is when several taxes are charged on the same income. Double taxation is when the same income is taxed more than once as it is moved from one geographical area (country) to another. All these result in reduction in investible funds available to the taxpayer. Again, when taxes are evaded by taxpayers, the government may not be able to provide the necessary services it should. Efficiency and effectiveness of the tax system as well as accountability of revenue agencies and the government are all critical if taxation is to contribute to economic growth. Generally, taxes should be few, broad-based and high-revenue yielding. They should also be flexible enough so that changes in economic situations can easily be incorporated into the tax system.

Preliminary analyses by the UN, estimate the financing gap for achieving the Sustainable Development Goals (SDGs) for developing countries at about .5 trillion annually. Much of this financing gap will need to be met by increased private-sector investment in sustainability, which requires appropriate tax policies to create the needed price incentives. Yet, developing countries that are most in need of revenues, including fragile and conflict-affected states (FCS), often face the steepest challenges in collecting taxes. Taxes have a key role to play in making growth sustainable and equitable, especially in the context of the COVID-19 crisis, and through such efforts as “greening” tax systems and fighting tax evasion and avoidance.

Many countries are still struggling to collect sufficient revenues to finance their own development. Countries collecting less than 15% of GDP in taxes must increase their revenue collection in order to meet basic needs of citizens and businesses. This level of taxation is an important tipping point to make a state viable and put it on a path to growth. As of 2022, several countries in Africa and other parts, fall below this 15% baseline. The need that the tax system is fair and equitable can not be overstated. Governments need to balance goals such as increased revenue mobilization, sustainable growth, and reduced compliance costs by ensuring that the tax system is fair and equitable. Fairness considerations include the relative taxation of the poor and the rich; corporate and individual taxpayers; cities and rural areas; formal and informal sectors, labour and investment income; and the older and the younger generations.

In last few decades, it was seen that some of the multinationals were not paying their fair taxes by resorting to shifting their profits to low tax jurisdictions. The G-20 and BEPS inclusive framework tried to address this situation. However digitalization of economies globally compounded the efforts of countries. Now a company can do business, including sales, purchase or provision of services, across the globe, without being present in a country. This has been affecting the taxation powers of the source countries where economic activities are taking place and they were not getting their fair share of taxes.

With a view to address this situation, India brought on statute, provisions of equalisation levy in the year 2016 with a view to initially address digital advertisement which was later extended to sales-purchase of commodities or provision of services in the year 2020, which is popularly called as digital tax. Later GST was also levied on such digital transactions, being done through e-commerce portals or platforms. In the meanwhile, discussions were taking place in OECD, UN and G-20 to address this situation wherein India contributed significantly. Thus and with a view to ensure that global companies, of a size, beyond certain revenue threshold, pay a certain minimum tax; pillar 1 and pillar 2 solutions were brought in to address this problem.

Taxes legitimately belongs to citizen of a country and if somebody is not paying his due share, he is letting down the people as also the country and is not fulfilling the legal and moral duty. As of now, the tax department is fully computerized and automated, with all tax processes being online, which has completely removed the human interface. This has reduced the cost of compliance, has reduced the processing time at the end of the department, which has created efficiency, transparency and accountability, the hall mark of a modern tax system. This has also promoted ease of doing business, which will promote overall economic activity, development and overall well being. This will help removing poverty, help in raising the living standard of people, raising per capita incomes and overall GDP, which are the hallmark of a fully developed nation.

Coming to Indian experience, we were able to make capital expenditure of over Rs. 10 lakh crores in the fiscal 2023-24, which was largely used to build road and railway network as also ports and airports and other logistics, using PM Gati Shakti. Imagine wherefrom we were able to moblize such huge funds for these works. It came from taxes both income taxes and indirect taxes like GST, customs etc. It may be mentioned that CBDT, the apex body of direct taxes, collected 19.58 lakh crore in taxes in 23-24, showing a growth of over 18%, even surpassing the revised tax collection target of Rs.19.45 lakh crores. With tax base of 8.25 crore taxpayers (over 11 crore effective assesses), the CBDT has done an excellent job in collecting increased taxes in a fair and transparent manner. The CBIC has also shown good progress and mobilized taxes of over Rs. 14.84 lakh crores. It is expected that as economy becomes more broad based and becomes more formalised and digitalized, more and more taxes would come through income taxes.

Another important dimension is the tax GDP ratio of India, which, presently at about 18% (including the state taxes) is slightly lower as compared to similarly placed economies. Experts feel that this should increase to a level of about 22%. It will happen by greater share of direct taxes, whose ratio is presently at about 6.2% in overall tax GDP ratio and has been hovering at about 5.5%-6.2%, in last 20 years or so. It is expected that in a few years, direct taxes ratio would increase to 7% and then to 8%. The role of digitalization, computerization, in capturing economic transactions from different sources, 360 degree profiling of taxpayers and use of technology AI-ML in identification of non filers and tax evaders is going to play a prominent role in this. Besides targeting the tax exemptions to specific areas which promote infrastructural development, manufacturing, industrial development and employment generation will increase per capita incomes, which, in turn, will stimulate higher income taxes payment by the people. A connected issue is the migration of HNIs to other countries and it is to be studied and examined whether it is happening on account of slightly higher surcharge on taxes levied here or other reasons like quality of life and how best to address the same. The tax administration, therefore, has to craft its own strategy, keeping a sharp eye on transactions which results into tax evasion and at the same time adopting a more facilitative and service oriented approach. The taxes are accordingly going to play a greater role in moblizing necessary resources to make India fully developed-Viksit Bharat by 2047, the centennial year of India's independence.

In the year 23-24, the growth of GDP has been robust and is estimated to be about 8% from budgeted growth of about 7.3%, that too against tough economic conditions world wide, specially because of disruptions in supply chains on account of Russia-Ukraine conflict and Israel-Hamas war. Also, world over protectionist tendencies are taking ground, which has been affecting the global trade. So, this year has been excellent for both the economy and the taxes. It is expected that in 2024-25, India may grow at the rate of 6.8% - 7%, which may be the highest amongst the major economies. This sustained growth is going to provide resources towards development of the country and expanding social agenda of the government. The PM has already indicated a flurry of activities, immediately after elections, and that the big ticket reforms are expected to be undertaken immediately after elections, so as to build the country for next 1000 years. The vision for next 25 years has been prepared by the NITI Ayog, the policy think tank of the country and all ministries have prepared 100 days programmes, as also next five years project schedule, to make India Viksit Bharat by 2047.

[The views expressed are strictly personal.]