Tax to GDP ratio may be biggest casualty of rising prices

Sources told The Indian Express that rising prices are going to be the biggest concern when the government prepares the Budget for the next fiscal. As such,the spurt in prices is going to pose a tough challenge to the government when it comes to increasing tax to GDP ratio. Tax-GDP ratio had risen to over 11 per cent during 2007-08 from 8.2 per cent in 2001-02,but has declined ever since to about 10 per cent last fiscal. This indicates that growth in tax collection has not been commensurate with the economic growth of the country.

The tax-GDP ratio is calculated on nominal size of the economy. So if the economy grows by around 9 per cent and inflation by 10 per cent,nominal GDP would be 19 per cent,making it difficult to raise the tax-GDP ratio. A low tax to GDP ratio indicates lower economic development and less equitable distribution of wealth.

Economists say that though inflation impacts both economic growth and tax revenues,it has a more immediate impact on growth. In the short run,the tax to GDP ratio may decline due to inflation,but in the medium term it will rise as wages and salaries get revised, said Mahesh Purohit,director,Foundation for Public Economics and Policy Research.

Worried by this phenomenon,the finance ministry is planning to step up the mechanism in the area of international taxation to enhance revenue collections as it does not have much scope for raising taxes in the forthcoming Budget. It is trying to plug lacunae in international taxation rules like Mutual Agreement Procedure (MAP),transfer pricing,revision in double taxation avoidance agreements to tap foreign transactions.

Since the government does not have many avenues for non-tax revenue generation the way it did in 2010-11 from 3G and disinvestment proceeds,the Centre will have a tough task ahead. With a target to bring down fiscal deficit to 4.8 per cent of GDP during 2011-12 from the estimated 5.5 per cent this fiscal,the government has to scout for more avenues of revenue generation or cut its expenditure.

Sources said that since the government has already proposed big ticket changes in its proposed Direct Tax Code (DTC),it is not left with many options. In the DTC Bill,introduced by finance minister Pranab Mukherjee last year,the government seeks to widen tax slabs to levy 10 per cent rate on income between Rs 2 lakh and 5 lakh,20 per cent on Rs 5-10 lakh and 30 per cent above Rs 10 lakh. Currently,income between Rs 1.6-5 lakh attracts 10 per cent tax; Rs 5-8 lakh 20 per cent and beyond Rs 8 lakh 30 per cent. However,the sources said that the government may provide some relief to the common man battling inflationary pressures.

In order to pave way for DTC,the Centre is also expected to bring out certain procedural changes in the next years budget and this would be a year of consolidation in terms of DTC,the sources added.