ExplainSpeaking: Are Indians being over-taxed? Here are 5 charts on where India stands globally

CHART 1.

Look at the list of countries on the right. At close to 80%, the Indian central government has a very high dependence on tax revenues. Many other comparable economies such as Brazil, Mexico and China are much less dependent on tax revenues. Cutting tax rates or collecting less taxes will force the Indian government to borrow more money from the market, thus competing with private firms for investible funds, and, in the process, driving up interest rates for everyone in the economy.

However, as CHART 2 bears out, when it comes to the total tax revenues as a share of total national GDP is concerned, India ranks fairly low; well below 20%.

CHART 2.

Most developed countries in Europe manage to raise much higher levels of revenues as a proportion of GDP. This suggests that those countries are more efficient at raising revenues and that India’s government, despite being desperately dependent on taxation for their expenditure, isn’t able to target as wide a tax base.

Of course, India is much poorer than the developed countries. It is here that CHART 3 helps place India in the global context. It maps tax revenues as a share of GDP versus GDP per capita. In other words, it tries to understand where India stands in terms of raising taxes (as a percentage of GDP) relative to its average income levels.

CHART 3.

What CHART 3 shows is that India fits into a broad pattern where the richer a country, the more capable its government is in raising taxes as a percentage of the overall GDP. So India is behind China, which, in turn, is behind the US. Of course, there are variations. For instance, France and Germany raise much higher tax revenues (as a percentage of GDP) than Saudi Arabia or even South Korea despite being roughly at a similar level of per capita income.

This suggests that older, more established economies are more efficient in raising revenues. It is noteworthy that India raises a higher proportion of tax revenues than countries such as Mexico and Indonesia that are much richer.

CHART 4 looks at what kind of taxes are used to bring in the revenue. This matters. Direct taxes such as personal incomes taxes are more progressive and just — that is, the rich can be made to pay a higher rate of tax as against the poor. Indirect taxes such as the GST are regressive since a poor person also pays at the same rate at which the rich pays. Unfortunately, this database did not have data for India but it is reported that in India both direct and indirect taxes roughly amount to around 7% (of the GDP) each.

CHART 4.

That would make India lie fairly favourably. There are countries such as Brazil, Chile, and Poland that have much higher levels of indirect tax collections while having the same levels of direct tax collections. The CHART also shows that the real difference happens on the direct tax front where the richer developed countries use it to raise much higher levels of taxation as against emerging economies such as China or Vietnam or indeed India.

The combined reading of CHARTS 3 and 4 is that Indian taxpayers should expect higher tax collections especially from direct taxes such as personal income taxes as India becomes richer and the Indian government becomes more efficient in collecting taxes.

CHART 5 looks at whether electoral democracies tend to tax their citizens more.

CHART 5.

As the data shows, there is a clear trend: the higher a rank for a country in electoral democracy, the more tax revenues its government is able to raise. So India does better than Bangladesh while it is behind Brazil, the US and Germany on both electoral democracy index as well as tax revenue collection (as a % of GDP). In other words, as India improves its electoral democracy ranking, expect higher tax collection.

Of course, there are countries that lie at the opposite end of the spectrum. For instance, notice how the Chinese government is able to raise a higher proportion of tax revenues than Chile despite being nowhere near in electoral rankings. Similarly, Poland manages to raise more revenues despite being at the same level on the electoral democracy index as Indonesia and Mexico.

Upshot

While it is true that, thanks to repeated economic shocks as well as the government’s inability to successfully kick-start a virtuous cycle of economic growth in the country, there are many who believe that the Indian government is overtaxing citizens.

But as the data has shown, India’s tax revenues (as a percentage of GDP) is not as high as many of the developed countries even though it funds a remarkably high proportion of central government’s spending. Moreover, as India becomes richer (in per capita income terms), and its democracy deepens, tax collection can be expected to go higher.

Should the government cut income taxes in the forthcoming Budget? Will that work in reviving the economy? Share your views and queries at udit.misra@expressindia.com

Take care,

Udit