Strive for ascension

Prime Minister Narendra Modi has set an ambitious target of making India a developed nation by the time we celebrate 100 years of our independence. While the Prime Minister's inspiring vision of a progressive India by 2047 invokes the collective spirit of over 1.4 billion Indians to bring about this envisaged change, it is critical to understand what makes India a developing country and what needs to be acted upon for it to become a prosperous nation in the coming years?

India was classified as a 'third-world' country at the time of its Independence from British rule in 1947. But, over the past seven decades, its economy has grown from Rs 2.7 lakh crore to USD 3.5 trillion, overtaking the economy of our colonial rulers, and making it the fifth-largest in the world. India's growth trajectory pegged at almost seven per cent for 2023, is more than double the world average and the fastest among major economies. Many experts are also of the strong view that the country's economy could increase to become the world's third-largest by 2050, after the United States and China.

While these figures indicate robust growth momentum, one must also keenly view other important parameters such as per capita income, the level of industrialization, the general standard of living, the human development index, the amount of infrastructure and so on which gauge how well we are doing.

In my view, India at 75 is a mélange of development and lost opportunities. On one hand, we have achieved much in terms of advancement in science and technology, education, sufficiency in food production, power, and road infrastructure among others, while on the other hand, several challenges exist, and a lot remains to be done if we want to attain developed country status.

One area where India has struggled most over the years is its tax-to-GDP ratio. According to a World Bank paper (2018), tax revenue above 15 per cent of a country's GDP is key to economic progress. This level of taxation ensures that countries have the money necessary to invest in the future and achieve sustainable socio-economic growth.

India's gross tax to GDP was 9.88 per cent in 2019-20, 10.11 per cent in 2020-21 and 11.7 per cent in 2021-22. While it indicates an upward trend, it is much lower than the emerging market economy average of 21 per cent and the OECD average of 34 per cent. Advanced countries generally have a far higher ratio. Nations such as Denmark, France, Finland and Italy had a tax-to-GDP ratio as high as 40-45 per cent as of 2020 whereas Asian economies such as Singapore, Malaysia, Indonesia and the Philippines have a ratio between 10-16 per cent.

A low tax-to-GDP ratio poses significant challenges for the government to spend money on creating necessary infrastructure in the economy and raising investment. It also stresses spending on national security, the welfare system, public goods and so on. Therefore, it is essential to take the requisite steps to increase the country's tax-to-GDP ratio. Measures such as getting the informal sector into the formal fold, rationalising tax structures and having stringent penalties for defaulters are imperative to address three core issues for India – widening the tax base, improving compliance and yielding higher tax revenue.

On one hand, data indicates that a meagre five per cent of Indians pay direct taxes, while on the other hand, we are seeing rising incomes, consumption and spending in our country. A survey by economic research outfit PRICE (People Research on India's Consumer Economy) states that the share of the middle class, with an annual household income of Rs 5-30 lakh has more than doubled from 14 per cent in 2004-05 to 31 per cent last year. The consumer durables sector in India is also seeing revenue growth of 15-18 per cent this financial year, with Indians spending more on refrigerators, washing machines, air conditioners and so on (CRISIL Report 2022).

Deloitte's latest analysis indicates that consumers are willing to increase spending on both travel and hotel stays. It also estimates that India's automobile industry is expected to grow at a high pace in the next six months as consumers' intent to buy a vehicle grew by 9 per cent over the past four months.

While the above indicates rising incomes and strong domestic consumption, driving economic growth, the anomaly of a small number of taxpayers and tax base not growing commensurately remains.

Further, in India, there are various ways through which people evade taxes, be it through smuggling of goods, evasion of income tax, customs and excise duties and so on. A report by the State of Tax Justice states that India is losing more than USD 10.3 billion (around Rs 75,000 crore) in taxes every year due to international corporate tax abuse and private tax evasion. According to finance ministry reports, the central GST authorities had detected evasion of Rs 70,206 crore between July 1, 2017 (launch of GST) and January 2020. Experts go on to suggest that the incidence of GST evasion could be much higher if cases detected by state GST authorities are also considered.

Illicit trade in the form of smuggling across borders, which is primarily undertaken to evade taxes, also causes significant losses to the nation's exchequer. A FICCI CASCADE report released in September 2022 estimated that the value of the illicit market in five key Indian industries, including mobile phones, FMCG-household and personal goods, FMCG-packaged foods, tobacco products, and alcoholic beverages was Rs 2,60,094 crore for the year 2019-20, resulting in an employment loss of 15.96 lakh.

The report also values tax loss to the government due to illicit goods in the above industries to the tune of Rs 58,521 crore, with two highly-regulated and taxed industries, tobacco products and alcoholic beverages, accounting for nearly 49 per cent of the overall tax loss.

More often than not, excessive taxation is cited as the reason for high tax evasion. A World Bank paper of 2018 found that India's GST is relatively more complex with its high and multiple tax rates when compared with 115 other countries, where 49 have one rate, 28 have two and only 5 countries, including India, use four non-zero rates. Commenting on these, the paper said high and multiple rates make the system complex, add to the cost of compliance, and incentivise tax evasion.

The Laffer Curve, which shows the relationship between tax rates and the amount of tax revenue collected by governments, also points to the fact that an optimal tax rate maximizes total government tax revenue. If we look at Singapore for instance, which is a vibrant Asian economy, the fundamental tenet of its tax policy is to keep tax rates competitive, both for corporations as well as for individuals. With GST at 7 per cent and personal tax at 0-22 per cent, the island city-state has not only become a global hub for international investment and commerce but also ensures that necessary revenue is collected to meet the country's socio-economic objectives. Due to its reasonable and simplified tax policies, it also rates high on tax compliance.

Therefore, it is evident that a country's tax system is a decisive factor in its economic performance. In India, the Modi government has taken several steps to have a well-balanced tax policy, improve compliance and strict action against tax evaders. As a result, India is witnessing record-breaking earnings from Goods & Services Tax. It is also seeing a healthy upward trend in the percentage of returns filed as well as in the number of e-way bills generated. While the Government of India has demonstrated stability as a cornerstone of its taxation regime, sustaining this trend through policy interventions should continue to be a top priority. This will clearly improve compliance, widen the tax base and maximise revenues for priority areas of the government, ultimately leading to nation-building. As we embark on our journey towards making a 'Viksit Bharat' during India's 'Amrit Kaal', a benign, broad-based progressive tax regime will most certainly be fundamental for a thriving national economy and will serve in the best interest of the nation in realizing the vision of a developed India.

The writer is Chairman, FICCI CASCADE and Senior VP, Corporate Affairs, ITC Ltd. Views expressed are personal