Is India Collecting Enough Taxes?

Total GST collections for the month of July, 2022 is estimated to be Rs 1.49 lakh crores

The July 31 deadline for filing income tax returns has passed and analysts expect yet another bumper year in 2022-23. India Tracker published a story on August 1 analysing how lower tax rates and better compliance had resulted in income tax collections going up 20 times over 20 odd years in this century. Soon after the story was published, the Finance Ministry released yet another set of encouraging data. Total GST collections for the month of July, 2022 is estimated to be Rs 1.49 lakh crores. This is the second highest GST collection during a single month ever since this regime was introduced in July, 2017. In April, 2022, GST collections had reached an all time high figure of Rs 1.68 lakh crores. The news about income tax returns and GST collections between April and July2022-23 give clear indications that Finance Minister Nirmala Sitharaman would have more than adequate tax revenues to spend on welfare schemes and infrastructure projects.

At the same time, as mentioned in another India Tracker story published on August 1, critics of the Narendra Modi regime have slammed him for imposing needless tax burdens on the poor and the lower middle class. Particular reference was made to the decision of the GST council to impose duties on unbranded but packaged wheat flour, curd, lassi, paneer and other items of daily use. The government was described as heartless and callous for imposing such regressive taxes when the lower income segment of India is already being battered by high inflation. From a news and rhetorical point of view, such noise does make sense. But what does the data suggest? Does the Indian economy collect enough taxes to fund public goods like health & education and also invest in physical infrastructure? How does t compare with peers when it comes to tax collections?

As the accompanying chart indicates, India’s performance compared to other countries is neither outstanding nor miserable. At the moment, total tax collections amount to just a shade more than 12% of the GDP. Two things need to be kept in mind while analysing the data here. The first is that the tax to GDP ratio has improved dramatically from 6% to 12% in this century. Second, the World Bank recommends that a tax to GDP ratio of more than 15% is considered good because that enables the government to invest more in social and physical infrastructure which in turn translates into more sustainable long term growth. Given that, the Indian economy does have some catching up to do, even when it comes to peer economies that constitute the BRICS. For instance, other members of the BRICS, China (17.5%), Russia (24.2%), South Africa (28.6) and Brazil (32.3) all have significantly higher tax to GDP ratios. Finance ministry officials n India have publicly stated that the use of digital technology and the increasing absorption of the “informal” economy into the formal taxpaying economy will raise India’s tax to GDP ratio to about 20% in some years.

So the data doesn’t suggest that India is collecting too much by way of taxes. It actually suggests whether it is collecting enough!