taxation and growth
TRANSCRIPT
TAXATION AND GROWTH
SOME FACTS ABOUT INDIA
Present GDP at market prices (at current prices) = 101,59,884 crores
Present GDP growth rate (at constant prices) = 4.96%
Development expenditure = 14,94,070 crores = 14.7% of GDP
Non-developmental expenditure = 13,28,680 crores = 13.1% of GDP
Total revenue = 20,24,765 crores = 20% of GDP
Total deficit (Centre and State combined) = 797985 crores = 8% of GDP
Total tax revenue = 17,51,123 crores = 17.5% of GDP
Non tax revenue = 2,26,891 crores
All the above data is for previous year 2012-13
9%
16%
2%10%
30%
33%
GDP distribution
Agri. & Allied Sector
Industry
Mining & Quarrying
Manu- facturing
Const- ruction
Services
MINISTRY OF FINANCE
Five departments :
Economic affairs
Expenditure
Revenue
Financial Services
Disinvestment
OBJECTIVE
To study the trends of GDP and other tax parameters of Centre (i.e. Income tax, Corporate tax, Customs, Excise).
To find correlation b/w the growth trends of the above mentioned parameters
INDIA'S GDP GROWTH RATE (CONSTANT PRICE)
1970
-71
1971
-72
1972
-73
1973
-74
1974
-75
1975
-76
1976
-77
1977
-78
1978
-79
1979
-80
1980
-81
1981
-82
1982
-83
1983
-84
1984
-85
1985
-86
1986
-87
1987
-88
1988
-89
1989
-90
1990
-91
1991
-92
1992
-93
1993
-94
1994
-95
1995
-96
1996
-97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
2006
-07
2007
-08
2008
-09
2009
-10
2010
-11
2011
-12
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
India's GDP growth rate (constant price)
% c
hange in
GD
P annually
The reasons for the 2 negative GDP growth
rates are : 1. India-pak war for Bangladesh in
1972 2. Severe drought crisis in 1979
The next major fall was after 1991 debt crisis of India which had severe
impact on manufacturing sector.
Post- liberalization was an important period of steady
growth.The fall in 2001-03, was seen mainly to bad performance of agricultural sector due to drought in
2002
Then major growths were seen in 1977, 89 and 2008.
1. The 2002 to 2008 boom was mainly due to growth of manufacturing, service sector and agriculture.
TRENDS IN NET TAX REVENUE TO GDP RATIO
1970
-7...
1971
-7...
1972
-7...
1973
-7...
1974
-7...
1975
-7...
1976
-7...
1977
-7...
1978
-7...
1979
-8...
1980
-8...
1981
-8...
1982
-8...
1983
-8...
1984
-8...
1985
-8...
1986
-8...
1987
-8...
1988
-8...
1989
-9...
1990
-9...
1991
-9...
1992
-9...
1993
-9...
1994
-9...
1995
-9...
1996
-9...
1997
-9...
1998
-9...
1999
-0...
2000
-0...
2001
-0...
2002
-0...
2003
-0...
2004
-0...
2005
-0...
2006
-0...
2007
-0...
2008
-0...
2009
-1...
2010
-1...
2011
-1...
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00Net Tax-GDP ratio
Net
tax r
evenue,G
DP r
ati
o
Tax policy was directed to raise
resources for public sector
without looking at the efficiency implications.
Socialistic pattern was made while attempting to achieve high taxation on oligopolistic rents generated by Licensing, quotas and restrictions. This involved a steeply progressive tax reforms.
An increase in the market size, and more visible sources of revenue the policies were inclined to collect taxes on the basis of multiple objectives
As a continuation of above, selectivity and description became a legitimate part of the tax system.
Real attempt to reform the tax system was only started in 1991, after the unprecedented economic crisis by the Tax reforms committee (TRC).
1. Broadening the base.2. Lowering marginal tax rates.3. Reducing rate differentiation.4. Simplifying the tax structure.5. Strengthening the administrative enforcements.
TRENDS IN NET TAX REVENUE TO GDP RATIO
1970
-7...
1971
-7...
1972
-7...
1973
-7...
1974
-7...
1975
-7...
1976
-7...
1977
-7...
1978
-7...
1979
-8...
1980
-8...
1981
-8...
1982
-8...
1983
-8...
1984
-8...
1985
-8...
1986
-8...
1987
-8...
1988
-8...
1989
-9...
1990
-9...
1991
-9...
1992
-9...
1993
-9...
1994
-9...
1995
-9...
1996
-9...
1997
-9...
1998
-9...
1999
-0...
2000
-0...
2001
-0...
2002
-0...
2003
-0...
2004
-0...
2005
-0...
2006
-0...
2007
-0...
2008
-0...
2009
-1...
2010
-1...
2011
-1...
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00Net Tax-GDP ratio
Net
tax r
evenue,G
DP r
ati
o
Tax Enquir
y Commission
(1953)
Nicholas Kaldor Commission (1956)
Direct Taxes Enquiry Committee (1971)
Indirect Taxes Enquiry Committee (1977)
Tax reforms Committee (1991)
Task force on Direct & Indirect taxes (2002)
Parthasarathi Shometo headed Tax Administration Reform Commission (TARC) )
TRENDS IN PERSONAL INCOME TAX
1970
-71
1971
-72
1972
-73
1973
-74
1974
-75
1975
-76
1976
-77
1977
-78
1978
-79
1979
-80
1980
-81
1981
-82
1982
-83
1983
-84
1984
-85
1985
-86
1986
-87
1987
-88
1988
-89
1989
-90
1990
-91
1991
-92
1992
-93
1993
-94
1994
-95
1995
-96
1996
-97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
2006
-07
2007
-08
2008
-09
2009
-10
2010
-11
2011
-12
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
Trends in Net direct taxes
PIT/GDP
net
PIT
/GD
P,
Net direct taxes includes only the net sum received by the
centre 1973-74, the personal income tax had 11 tax slabs with rates between 10 percent and 85. surcharge of 15 percent was taken into account, the highest marginal rate for persons above Rs. 0.2 million income was 97.5 %
1974-75, the tax was brought down to 77 percent including a 10 percent surcharge
marginal rate was further brought down to 66 percent and the wealth tax rate was reduced from 5 percent to 2.5 percent in 1976-77.
The major simplification and rationalization initiative, however, was in 1985-86 when the number of tax slabs were reduced from eight to four and the highest marginal tax rate was brought down to 50 percent and wealth tax rates to 2.5 percent
Tax rates were considerably simplified to have three slabs beginning with a rate of 20 percent, a middle rate of 30 percent and the maximum rate of 40 percent in 1992-93.
Further reduction came in 1997-98 when, the three rates were brought down further to 10-20-30 percent respectively.
assessment year (2013-14) men and women, the slab is Rs. 2.0-5-10 lakhs @ 10-20-30 percentage
new Direct tax bill (DTC), the bill proposes to tax incomes in excess of Rs. 10 crore at 35% rate against current rate of 30%.
TRENDS IN CORPORATE TAX
1970
-71
1971
-72
1972
-73
1973
-74
1974
-75
1975
-76
1976
-77
1977
-78
1978
-79
1979
-80
1980
-81
1981
-82
1982
-83
1983
-84
1984
-85
1985
-86
1986
-87
1987
-88
1988
-89
1989
-90
1990
-91
1991
-92
1992
-93
1993
-94
1994
-95
1995
-96
1996
-97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
2006
-07
2007
-08
2008
-09
2009
-10
2010
-11
2011
-12
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Trends in Net direct taxes
CT/GDP
net
PIT
/GD
P,
The rates were between 45-65%.
Minimum Alternate tax (MAT) was proposed by TRC in 1991, though it was implemented only around 1997-98.
1993-94, these were brought down to 40%
In 1997-98 these rates were made 35% while the levy of 10% dividend tax was shifted from individuals to companies.
Presently the tax payable by the domestic companies is at flat rate of 30% while for the foreign companies it is at the rate of 40%. An educational cess of 3% on total tax payable which includes corporation tax and surcharge, is payable
TRENDS IN PERSONAL INCOME TAXES
-40 -20 0 20 40 60 80 100 120 140 160 1800
2
4
6
8
10
12
14
16
Distribution of ▲PIT rates
Bin Size of ▲PIT rates
Frequency
1971
-72
1974
-75
1977
-78
1980
-81
1983
-84
1986
-87
1989
-90
1992
-93
1995
-96
1998
-99
2001
-02
2004
-05
2007
-08
2010
-11
-50
0
50
100
150
200
Annual changes in PIT
PIT
%
highly random negative in certain years : in 10 years between 1971 to 2001. Year 2000-01 saw PIT revenue
increase by almost 160 %.
It can also be said about the PIT that after 1991 reforms, due to decrease in marginal rates and increase in compliance the randomness in PIT
collection has decreased and achieved a steady growth.
Mean = 25.02 %Standard Deviation
45.39 %
1949
-50
1960
-61
1971
-72
1973
-74
1980
-81
1990
-91
1995
-96
1998
-99
2000
-01
2002
-03
2004
-05
2006
-07
2008
-09
2010
-11
2012
-13
INR -
INR 200,000.00
INR 400,000.00
INR 600,000.00
INR 800,000.00
INR 1,000,000.00
INR 1,200,000.00
Lower and Upper limits of Income tax
ExemptionLimit (`)
Income at which the peak rate applies (`)
1949
-50
1960
-61
1971
-72
1973
-74
1980
-81
1990
-91
1995
-96
1998
-99
2000
-01
2002
-03
2004
-05
2006
-07
2008
-09
2010
-11
2012
-13
0
20
40
60
80
100
120
Entry rate and peak rate of individual taxes
entry rate peak rate
RETRUN
TRENDS IN CORPORATE TAX
1971
-72
1974
-75
1977
-78
1980
-81
1983
-84
1986
-87
1989
-90
1992
-93
1995
-96
1998
-99
2001
-02
2004
-05
2007
-08
2010
-11
-30
-20
-10
0
10
20
30
40
50
60
Annual changes in CT
CT %
-20 -15 -10 -5 0 5 10 15 20 25 30 35 40 45 50 550
2
4
6
8
10
12
14
Distribution of CT rates▲
Bin Size of CT rates▲
Freq
uenc
y
An average of annual increase of 12% is seen in 15 of the sampled years between(1976 to 2009). Highest increase has been seen in 1981 of 50% and lowest of -18% in 2000.
Compared to PIT the variance in CT is less and data to is more consistent.
TRENDS IN NET INDIRECT TAXES
The rates were between 45-65%.
Tax structure was a mix of specific and ad valorem.There were 24 different tax rates on various commodities ranging from 2% to 100% (Tobacco and petroleum related products were taxed even higher).
Manufacturing Value added taxes (MANVAT). Proposed in 1977. implemented in 1986-87
MODVAT in 1996. MODVAT included both excise duty and customs duty.
1st April 2000, central Value added tax (CENVAT) was introduced.
Budget 2012-13, CENVAT rate was enhanced from 10% to 12%
1970
-71
1971
-72
1972
-73
1973
-74
1974
-75
1975
-76
1976
-77
1977
-78
1978
-79
1979
-80
1980
-81
1981
-82
1982
-83
1983
-84
1984
-85
1985
-86
1986
-87
1987
-88
1988
-89
1989
-90
1990
-91
1991
-92
1992
-93
1993
-94
1994
-95
1995
-96
1996
-97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
2006
-07
2007
-08
2008
-09
2009
-10
2010
-11
2011
-12
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Trends in Excise taxes
E/GDP
net
E/G
DP,n
et
C/G
DP
TRENDS IN NET INDIRECT TAXES
1970
-71
1971
-72
1972
-73
1973
-74
1974
-75
1975
-76
1976
-77
1977
-78
1978
-79
1979
-80
1980
-81
1981
-82
1982
-83
1983
-84
1984
-85
1985
-86
1986
-87
1987
-88
1988
-89
1989
-90
1990
-91
1991
-92
1992
-93
1993
-94
1994
-95
1995
-96
1996
-97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
2006
-07
2007
-08
2008
-09
2009
-10
2010
-11
2011
-12
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Trends in Customs taxes
C/GDP
net
E/G
DP,n
et
C/G
DP
High and differentiated tariffs and setting the rates varying with the stage of production (lower rates on inputs and higher rates on
finished goods).
income elasticity of demand resulted IN distortions in allocation of resources.
1990–1991, the tariff structure was highly complex varying
from 0 to 400%, Over 10% of imports were subject to more
than 120%.reduction in the peak rate from over 400 to 50% by 1995–1996.
The number of major duty rates was reduced from 22 in 1990-91 to 4 in 2003-04.
TRENDS IN CUSTOMS DUTY
1971
-72
1975
-76
1979
-80
1983
-84
1987
-88
1991
-92
1995
-96
1999
-00
2003
-04
2007
-08
2011
-12
-20
-10
0
10
20
30
40
50
Annual changes in Customs duties
C %
-16-12 -8 -4 0 4 8 12 16 20 24 28 32 36 40 440
2
4
6
8
10
12
Distribution of ▲C rates
Bin Size of ▲C rates
Frequency
The average duty being 10% between 4% to 16% in 28 of the 40 analyzed years. The highest increase in Customs collected were seen in 2000 @ 42%,
while the most decrease were seen in 1979 and 2008 @ -16%..
TRENDS IN EXCISE DUTY
1971
-72
1974
-75
1977
-78
1980
-81
1983
-84
1986
-87
1989
-90
1992
-93
1995
-96
1998
-99
2001
-02
2004
-05
2007
-08
2010
-11
-40
-20
0
20
40
60
80
Annual changes in Excise duties
E%
-30 -24 -18 -12 -6 0 6 12 18 24 30 36 42 48 54 60 660
2
4
6
8
10
12
Distribution of ▲E rates
Bin Size of ▲E rates
Frequency
Excise duty has been consistent, less variant in early years but over the last few years it has seen certain anamolies by sudden decrease in collections.
Highest decrease has been observed in year 2000 @ -29%, followed by 2001,08,09. Highest increase was seen in 2010 @ 62%.
ANALYSIS
1970
-7...
1971
-7...
1972
-7...
1973
-7...
1974
-7...
1975
-7...
1976
-7...
1977
-7...
1978
-7...
1979
-8...
1980
-8...
1981
-8...
1982
-8...
1983
-8...
1984
-8...
1985
-8...
1986
-8...
1987
-8...
1988
-8...
1989
-9...
1990
-9...
1991
-9...
1992
-9...
1993
-9...
1994
-9...
1995
-9...
1996
-9...
1997
-9...
1998
-9...
1999
-0...
2000
-0...
2001
-0...
2002
-0...
2003
-0...
2004
-0...
2005
-0...
2006
-0...
2007
-0...
2008
-0...
2009
-1...
2010
-1...
2011
-1...
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00Net Tax-GDP ratio
Net
tax r
evenue,G
DP r
ati
o
In the first, there was a steady increase in the net tax–GDP ratio to 5.15% by
1970-71. This further increased to 6.57% in 1981-82 and reached to a peak of 7.73% by
1988-89.
The increase in tax ratio was necessitated by the need to finance
large public sector plans.
The buoyancy of the tax in later years of the phase was fuelled by the economy
attaining a higher growth path.
As the economy started booming, manufacturing sector performing well
thus revenue collection from these sources were increased on various fronts
of tax collections.
1988-89, saw a pay-scale revision of employees, increasing the expenditure GDP ratio of the
country. This led to serious fiscal
imbalances or a very high debt-GDP ratio which led to the famous
economic crisis of India.
The impact of this was seen in coming years fall in net tax-GDP ratio which were 7.43%, 6.80% and 6.00% respectively in 1991-92,92-93,93-94 financial years.
In third phase, the ratio decreased to around 5.7 % in 2001-02. Thus 1991 to 2001 period saw slight fluctuations
though it overall remain steady at an average rate of
around 6%
The Fourth phase saw a continuous increase in the net tax-GDP ratio
from the average 6% to around8.81% in 2007-08.
This coincides with highest GDP growth rate of India after
independence.
Thus the increase in ratio can be attributed to the Tax buoyancy.
Though last few years this seen a slump in the ratio which stands at
7.25% in FY 2011-12.
COMPARISON OF DIRECT-INDIRECT TAXES
1970
-71
1971
-72
1972
-73
1973
-74
1974
-75
1975
-76
1976
-77
1977
-78
1978
-79
1979
-80
1980
-81
1981
-82
1982
-83
1983
-84
1984
-85
1985
-86
1986
-87
1987
-88
1988
-89
1989
-90
1990
-91
1991
-92
1992
-93
1993
-94
1994
-95
1995
-96
1996
-97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
2006
-07
2007
-08
2008
-09
2009
-10
2010
-11
2011
-12
2012
-13
0
10
20
30
40
50
60
70
80
90
Trends of direct & indirect taxes
Ratio of direct taxes Ratio of Indirect taxes
% c
on
trib
uti
on
to t
ota
l ta
x r
even
ue
CORRELATION B/W GROWTH RATES
▲ GDP % ▲PIT % ▲ CT % ▲ C % ▲E%
▲ GDP % 1
▲PIT % 0.124462 1
▲ CT % 0.1959440.071996 1
▲ C % 0.011436 0.45604 -0.0583 1
▲E% 0.302357 -0.084760.3443280.101003 1
MULTIVARIATE REGRESSION
Regression Statistics
Multiple R 0.996161
R Square 0.992336
Adjusted R Square 0.991508
Standard Error 2046.519Observations 42
GDP = f (PIT, CT, C, E)
ANOVA
df SS MS F Significance F
Regression 4 2.01E+10 5.02E+09 1197.706589 1.41E-38
Residual 37 1.55E+08 4188240
Total 41 2.02E+10
CoefficientsStandard
Error t Stat P-value
Intercept -8.43232 521.2889 -0.01618 0.987180977
PIT -22.8175 13.27389 -1.71898 0.093975931
CT 31.93186 6.788522 4.703802 3.50897E-05
C 25.52353 4.709221 5.419905 3.83206E-06
E 6.734679 5.244044 1.284253 0.207036884
Y = -8.4 – 22.8 * PIT +32 * CT + 25.5 * C + 6.734 * E Y = 1062 + 23*CT + 24 * C.
FINDINGS
Though the analysis hasn’t been shown, according to Granger’s causality test there has been a high causality b/w GDP parameter and 2 year lag tax revenue parameter, suggesting high impact of a GDP growth after 2 years on tax revenue.
The non-development expenditure on the Fiscal services i.e. Tax collection charges = 26724 crores = Amount spend on collecting taxes is very high and must be reduced
The Tax-GDP ratio in the Indian context (which is nearly 18 percent), it is far less than such a ratio for developed countries like Sweden (50 percent), U.K. (25 percent), U.S.A. (25 percent).
Post liberalization, Income Tax Revenue showed accelerating pattern; but for Excise Duties and Customs Duties, the growth path was decelerating. Thus, as it appears, the policy of liberalization has induced a rather suppressive impact on India’s tax revenue’s growth rates.
Although the rate of growth in GDP has been fairly high (7 percent or above) in the past a few years; yet, Tax-GDP ratio has not grown rapidly
RECOMMENDATIONS
The indirect tax revenue is expected to grow at a slower pace in the future due to free trade policies of govt.
Under this scenario, efforts need be made to increase direct tax revenue by expanding the tax base through bringing under tax net, all professionals, traders (including small retailers), companies and effectively handling huge stock of black money in the country.
There do exist certain rich landlords/agriculturists/orchardists. There is a need to bring, the rural rich into the tax net
Tax administration need to streamlined to improve tax compliance and check tax evasion.
Tax should be transparent and income of each individual from all sources should be subjected to proper public scrutiny..
Government needs to expand the tax base and bring more and more people under the tax net;
RECOMENDATIONS
Government’s expenditure to all-important activities like education and health has been less than 5 percent of its GDP. Therefore, there is a need to curtail expenditure on unproductive activities so as to make increased allocations for physical/social infrastructure.
THANK YOU