India's Low Tax Paying Population

In India, a very tiny fraction of the population pays taxes. But if you look at its GDP per capita, then India is not an outlier, writes Karthik Muralidharan in Accelerating India’s Development. In simple terms, that means poorer countries tend to have a low tax paying base. Conversely, more people pay taxes in richer countries. It may be hard to believe but:

“Our revenue collection is in line with global and historical benchmarks.”

 

But why is tax base related to the richness or poverty of a country?

“These patterns reflect greater formalization of the economy in richer countries.”

The good news is that as poorer countries get better off, their tax base increases (this is a historical trend). One reason for this is that the administrative capability to tax increases as a country grows richer.

 

Further, the richer a country grows, the more the government can do (it has more money, after all). And the more the government does, the more the number who are willing to pay taxes (they can see the benefits and services provided).

 

Here’s a surprising fact:

“India has achieved a 17% tax-to-GDP ratio at a lower income than the US or UK had when they reached this ratio.”

 

This pattern scales down to state levels too. The poorer a state is, the lower the taxes it is able to collect. Conversely, the richer states of India are able to raise more taxes.

 

Ever wondered why property tax revenue is so low in India? It is because of who controls the property tax that gets collected. No, it is not the state government. It is not the Center either. Rather, it is the local body. So the state governments have little interest in pushing this revenue stream. This is very sad for multiple reasons: (1) Property is neither mobile nor can it be hidden, so logically it should be easy to tax, yet it isn’t; (2) Property tax goes to local bodies who would have used it to fund local public services, which is what so many of us desperately seek; and (3) improved local infrastructure would increase property values in the area, setting off a virtuous cycle of yet more property tax collection.

 

The next time someone says that India’s tax base is so low because “We Indians are like this”, take heart. It’s not because of our DNA. It’s because we are a poor/middle-class country. If history is any guide, our tax base will increase as we get richer.