Tax: GDP and Revenue foregone

Tax: GDP and Revenue foregone

Subject: Economy

Context:

Bibek Debroy has suggested that given the huge resource gap, Citizens should be willing to pay higher taxes or settle for reduced delivery of public goods and services.

Details:

Bibek Debroy highlighted that the total tax GDP ratio comes to 15 per cent even as the demands for government spending on physical and social infrastructure is estimated at 23 percent of GDP.

Debroy suggested that India must at some point agree to move to a completely exemption less tax system, noting that exemptions are making the system complex. The revenue foregone by the government because of exemptions is currently 5.5 Percent of GDP

Concepts:

Tax: GDP

• It  is a gauge of a nation’s tax revenue relative to the size of its economy as measured by gross domestic product (GDP). 
• Tax-to-GDP ratio is calculated by dividing the tax revenue of a specific time period by the GDP.
• The ratio provides a useful look at a country’s tax revenue because it reveals potential taxation relative to the economy.
• It also enables a view of the overall direction of a nation’s tax policy, as well as international comparisons between the tax revenues of different countries.
• Developed nations typically have higher tax-to-GDP ratios than developing nations.
• A tax-to-GDP ratio of 15% or higher ensures economic growth and, thus, poverty reduction in the long-term, according to the World Bank.

Tax Base

The tax base is the total amount of assets or revenue that a government can charge tax on. For example, the assessed value is the tax base for property taxes and taxable income is the tax base for income tax. It can also be defined as the total of taxable income, taxable assets, and the assessed value of property within the government tax jurisdiction.

Tax Base in India

The tax base is different for direct tax and indirect tax. Direct taxes include income tax and property tax, whereas indirect taxes include GST, excise duty, and customs duty.

The Income Tax Act under direct tax laws lays down the regulations of income tax. For example, an individual and HUF assessees with income more than Rs.2.5 lakh has to pay tax under the income tax. But there is no such income limit for other assessees like companies, partnership firms. The total of taxable income from all taxpayers constitutes the tax base.

The Goods & Services Tax Act decides the GST base under indirect tax laws. For example, a registered person whose turnover is above Rs.40 lakh has to pay GST. The turnover of all taxpayers will constitute the tax base.

To arrive at the tax liability, we should multiply the tax base with the respective tax rate.

The size and growth (increase or decrease) of the tax base is crucial to the planning of local, state, or central government. The tax base size influences the taxable revenues which are available to a government. There is a direct correlation between the economic condition of the country and the budget of the government. The government has to always consider how their decisions will affect their tax base.

Revenue Foregone

• The revenue forgone is also referred to as tax expenditure or indirect subsidy to taxpayers.
• The tax policy provides specific tax incentives which give rise to tax preferences. Such preferences have a definite revenue impact
• The Indian government started publishing the Statement of Revenue Foregone in 2006. This estimate of revenue foregone is intended to indicate the potential revenue gains if all tax incentives (exemptions, deductions and similar measures) were rationalized.