The Tax System in India

Abstract

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper assesses the effects of India's tax system on growth, through the level and productivity of private investment. Comparison of India's indicators of effective tax rates and tax revenue productivity with other countries shows that the Indian tax system is characterized by: (1) a high dependence on indirect taxes, (2) low average effective tax rates and tax productivity, and (3) high marginal effective tax rates and large tax-induced distortions on investment and financing decisions. The paper finds that the most recently proposed package of reforms would improve tax productivity and lower the marginal tax burden and tax-induced distortions. But firms that rely on internal sources of funds or face problems borrowing would continue to face high marginal tax rates.

Tax Challenges Facing Developing Countries

“…Bird, Martinez-Vazquez and Torgler (2006) analyze both revenue and tax ratios in developing countries and find no great differences in most instances. 6 For instance, as Poirson (2006) shows, general government revenues as a share of GDP have been surprisingly constant over time in India. collection efforts is particularly naïve. 7 There is more to improving tax effort than simply exhorting countries to try harder.…”

“…14 See Poirson's (2006) description of the current Indian tax system for a depressingly good example. 15 In the case of Jamaica, for example, exempting only five narrowly-defined items cut the VAT burden on the lowest 40 percent of the income distribution in half (Bird and Miller 1989).…”

India’s Experience with Fiscal Rules: An Evaluation and the Way Forward

“…The deterioration was the result of the combined effect of significant reform-induced losses in revenue (namely from reductions in customs and excise duty rates), poor tax performance due to a narrow tax base and low tax buoyancy (Poirson, 2006), and government's inability to contain current public spending. Both the center and the state governments contributed to the fiscal deterioration in India, with the implementation of the civil service wage increases recommended by the Fifth Pay Commission widening deficits, especially at the state level ( Figure 1).…”

Fiscal Policy in an Emerging Market Business Cycle Model

“…In particular, the value of c is …xed at 0:12 to match the VAT rate applicable in India. We …x the factor income tax rates low at k = w = 0:01 which follows the estimated average e¤ective tax rates in Poirson (2006): We also …x = 5: Table (3) summarizes our choice of deep parameters in our model. 29 26 We consider the average nominal PLR of three major banks in India -the State Bank of India SBI, ICICI bank and IDBI bank.…”

“…Given that India has a very narrow income tax base and depends more on generating revenue from indirect taxation, we allow for a high tax on consumption and a low income tax (see Poirson (2006)). In particular, the value of c is …xed at 0:12 to match the VAT rate applicable in India.…”