The Hindu Business Line : Low tax-GDP ratio daunts India's quest to join developed world

But with targets of the gross tax/GDP ratio (combined Centre and States) not reaching the 17 per cent the country had in the past, the latest picture from OECD on the tax front highlights the Herculean task ahead for the Indian tax authorities to push up the ratio. Incidentally, tax receipts as a percentage of GDP was 15.4 in 1990-91 and it was 15.1 in 2003-04 and is estimated at 16 in 2004-05.

A just-released study by the inter-governmental think tank of 30 industrial countries in Paris showed that tax policies vary widely from country to country in the OECD area. The ways in which governments raise money through taxation continue to vary widely across the OECD, with Denmark collecting almost 60 per cent of its revenues from personal and corporate taxes and France less than 25 per cent, according to data in the latest edition of the OECD's annual Revenue Statistics publication.

In North America, Mexico collects more than half of its tax revenue from taxes on the sales of goods and services while the US raises less than a fifth of its revenue from this source. At regional and local level, different patterns are also visible. While most countries use a mix of state and local taxes to finance sub-national government, Ireland and the UK rely exclusively on local property taxes.

In 2004, the OECD publication reveals, Sweden once again had the highest tax-to-GDP ratio among OECD countries, at 50.7 per cent against 50.6 per cent in 2003. Denmark came next at 49.6 per cent (48.3 per cent), followed by Belgium at 45.6 per cent (45.4 per cent). At the other end of the scale, Mexico had the lowest tax-to-GDP ratio, at 18.5 per cent, against 19.0 per cent in 2003. Korea had the second lowest, at 24.6 per cent (25.3 per cent), and the US had the third, at 25.4 per cent (25.6 per cent).

The ratio of total tax revenues to gross But, comparisons are not always easy to make: for example, many countries with high tax-to-GDP ratios provide family benefits as cash payments rather than as tax reductions, increasing the apparent tax burden as measured by the tax-to-GDP ratio.

Taking the 30-nation OECD area as a whole, the tax-to-GDP ratio calculated on an unweighted average basis fell marginally in 2003 - the latest year for which complete figures are available — to 36.3 per cent, from 36.4 per cent in 2002 and from a peak of 37.1 per cent in 2000. In 1975, the average tax-to-GDP ratio was 30.3 per cent.

The Netherlands showed the biggest percentage point reduction in the overall share of taxation in its economy, with the tax-to-GDP ratio falling two percentage points to 39.3 per cent of GDP in 2004 from 41.3 per cent in 1975. In Spain, by contrast, the tax-to-GDP ratio jumped by almost 17 percentage points from 18.2 per cent in 1975 to 35.1 per cent in 2004.

Recent changes in tax-to-GDP ratios in many countries have reflected the combined impact of changes in economic growth and lower rates of taxation on personal and corporate income. The OECD average corporate tax rate fell from 33.6 per cent in 2000 to 29.8 per cent in 2004, while the average top personal income tax rates fell from 47.1 per cent to 44.0 per cent. These resulted in marked falls in revenues between 2000 and 2002, when economic growth was sluggish, but a revival of economies in 2003 led to a recovery in revenues, thanks to the positive impact of growth on incomes and profits, and hence in the overall tax base.

A report tabled in Parliament by the Comptroller and Auditor General of India early this year said the audit examined the status of improvement of efficiency and productivity of the Income Tax department, following the implementation of a proposal for its restructuring in August 2000 by the Union Cabinet.

The Audit favoured that the information technology (IT) system of the department should generate a specific set of information, which could help effectively monitor areas of improvement as visualised in restructuring proposals. It said the working of chain system of internal audit could be reviewed to ensure compliance with targets and the criteria for working out the `cost of collection' must be critically reviewed after suitably factoring in pre-assessment collections, so as to present a transparent and correct picture of efficiency and productivity in this crucial area.

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