Working Paper: 448

 Tax Revenue in India: Trends and Issues

Pratap Singh

 

Abstract

India has a federal tax structure. Centre, states and local bodies collect taxes as per the scheme laid down under the Constitution, more particularly under the seventh schedule. Article 265, however, puts restrictions on this power and states that “No tax shall be levied or collected except by the authority of law”. Many countries have undertaken tax reforms in recent years, and some of them with significant success, which may act as a good benchmark for India. Such reforms are motivated both by local factors as well as the global economic scenario. While tax reforms in India have been carried out since the early fifties, the fiscal crisis of 1991 provided the first big opportunity for a serious rethink and action. Accordingly, a committee was set up under the chairmanship of Raja Chelliah to draw a roadmap for tax reforms and to put the economy on track. This committee suggested tax amendments of far-reaching consequences and initiated the process of liberalisation. As Bird (2014) pointed out, countries’ taxes affect investment, allocation and distribution of resources as also the rate of the economic growth and therefore the role of tax administration becomes quite important in developing countries. One particularly important aspect is benchmarking of the tax administration’s performance vis-a-vis global best practices and align it with such practices (Bird, 2014). Two common approaches to benchmarking are the quantitative approach and the qualitative approach. Both these approaches consider each component or aspect of the tax administration separately. Studies carried out by OECD, IDB and ADB about tax administrations of various countries may act as a comparative guide for developing countries like India to improve their tax administration. Trends analysis of tax collections therefore provides a good opportunity to evaluate the performance of tax systems in comparative terms. This paper presents a brief history of tax reforms in India. In the next section, trend analysis of tax collections in India as also the tax GDP ratio have been analysed, which show relative stagnation or deceleration in tax revenue. How tax policy changes impacted collection of taxes in India positively or otherwise is examined in the next section. An analysis of the costs of tax collection and possible efficiency of the tax system has also been undertaken. Also, international comparison of various tax administrations has been attempted so as to examine where the Indian tax administration stands vis-a-vis its global peers. Lastly, based upon global best practices, further reform direction is explored.

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