February 23, 2016

India is an outlier in its tax policy

In this Mint article, Praveen Chakravarty and Vivek Dehejia, Fellows at IDFC Institute, write about the peculiar and distorted nature of India's tax structure. 


They show that in terms of tax-to-GDP ratio and the ratio of direct and indirect taxes, India is an outlier when compared to other OECD countries. 


Excerpts from their article are below


"India’s tax-to-GDP ratio increased from 10.4% in 1965 to 17.2% in 2013. This includes both central and state tax revenues. The corresponding tax-to-GDP ratio for OECD countries (weighted by GDP) increased from 21% in 1965 to 33% in 2013. Purely in terms of a tax-to-GDP ratio, India has always been substantially lower than the average of OECD economies, over a 50-year period. Compared to a subset of OECD nations with lower GDP (Korea, Turkey, Mexico, Chile, Portugal, Greece, Slovenia, Indonesia and Poland), India’s tax-to-GDP is still lower at 17% versus an average of 24% for these nations."


Commenting on the economic theory on the subject they observe, "Economic theory is, perhaps surprisingly, silent on what might be an optimal tax-to-GDP ratio. Conventional macroeconomics does say that it is not optimal for the tax rate to exhibit erratic jumps up or down—this is Robert Barro’s famous “tax smoothing” proposition, but this does not pin down any optimum."


Regarding the share of direct and indirect taxes in total tax collections they note, "In the 50-year period of our analysis, India’s direct-to-indirect tax ratio has swung from a low of 13:87 to its current high of 35:65. For the OECD nations, throughout this 50-year period, the direct-to-indirect tax ratio has remained roughly constant in the range of 65:35."


The entire article can be accessed here

Topic : Transitions / In : OP-EDS
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