A Less Taxing Time

A Less Taxing Time

News: As India grows into a higher-income nation with more organized businesses, the government will earn more money prompting it to spend money wisely.

Expanding Taxpayer Base and Lower Tax Rates
• Growing Taxpayer Base - India has seen an increase in both direct and indirect tax payers, including individuals and companies, despite slower economic growth.
• Shift to Lower Taxes - The government's decision to lower tax rates, such as corporate tax and personal income tax, has contributed to a stable tax-to-GDP ratio.
• Formalization's Role - The formalization of the economy and simplified tax processes have discouraged tax evasion. However, it hasn’t proportionately boosted tax revenues.

Impact of Tax Cuts on Revenue
• Corporate Tax Reduction - Corporate tax rates were reduced from 30% to 22%, leading to a decline in the corporate tax-to-GDP ratio from 3.5% to around 3.1%.
• Personal Income Tax Changes - Tax rebates for individuals with taxable income up to Rs 5 lakh increased the tax-to-GDP ratio but also led to more individuals with zero tax liability.
• GST Rate Cuts - Despite a weighted average GST rate reduction from 14.4% to 11.6%, GST collections remained stable at 6.6% of GDP in 2022-23.

Fiscal Foundations Strengthening
• Future Revenue Potential - As India progresses towards upper-middle-income status with an expanding organized sector, tax revenue gains are expected to increase, providing more fiscal space.
• Caution against Overspending - While revenue growth offers opportunities for government spending, it's essential not to squander gains through excessive giveaways.
• Policy Considerations - Policymakers must strike a balance between lower tax rates and revenue requirements to sustain economic development.