The Hindu Business Line : <I>India's tax system </I>

A recent working paper prepared by the IMF under the title "Making India's tax system pro-growth" gives a balanced and constructive analysis of the country's efforts to make its tax structure support and speed up economic growth.

Its focus is on measures that would augment tax revenues which, in turn, would raise the level of investments desperately needed in physical and social infrastructure as a means of maintaining, sustaining, and even pushing up, the rate of growth. India's problem is "a patchwork tax system and low revenues", aggravated by "pervasive exemptions" resulting in the tax burden being spread inequitably.

The attempts made to lower statutory rates, broaden the tax base and reduce tariffs have no doubt had the beneficial effect of increasing the share of direct taxes in total revenue, but have not improved the ratio of tax revenues to GDP which continues to be low by international standards.

The paper, however, acknowledges the thrust given to tax reforms, such as, the addition of new services to the tax base, the introduction of a State-level VAT in 2005, and a modernised tax administration. It is interesting to know that a 35.9 per cent corporate income tax rate in India in 2003 generated revenue of only 2.3 per cent of GDP, whereas Singapore was able to raise three-and-a-half times that revenue with a rate of just 22 per cent. India's investment rate at around 31 per cent of GDP in 2005-06, but well below that of China (40 per cent of GDP).

Moreover, interest deductibility tends to favour finance through debt over equity or retained earnings, potentially leading to higher insolvency risks and discrimination against small companies that face difficulty borrowing. Other tax distortions include the widespread use of rebates, exemptions, and special regimes for specific sectors and regions." It bears a careful study by India's fiscal and monetary policy planners.

B. S. RAGHAVAN