In undertaking budget analysis somehow the larger focus has been on looking at expenditures while the revenue side of the budget is often ignored, except perhaps oil and gas or other mineral/natural resource based revenues when the particular economy is driven by such resources. However, often taxes do receive some attention in budget analysis within a macro-economic analysis with a focus most often on reducing or increasing tax rates or the tax base. The composition, character, nature and depth of the revenues have received very scant attention. Thus revenues not collected, revenues forgone, equity impact of revenues, etc. are often overlooked in mainstream budget analysis. It is time to shift gears and give greater weight to the revenue side of the budget because expenditure can only happen when there are adequate revenues.
Across OECD countries, as well as in a number of emerging economies, where tax:gdp ratios range between 30-50 percent, we see more responsible and accountable governance as well higher expenditures on social and welfare sectors. This is possible because adequate revenues, especially through taxes are raised but also because there is a large tax base, better tax compliance and minimal tax expenditures or forgone revenues. In most developing countries the contrary is true – lower tax:gdp ratios, smaller and skewed tax base, poor tax compliance, large scale evasion, large tax expenditures and incentives – and hence social sector spending is small and inadequate. For instance, in 2005 the average tax revenue to GDP ratio in the developed world was approximately 35%. In the developing countries, it was equal to 15%, and in the poorest of these countries, the group of low income countries, tax revenue was just 12% of GDP. The cocktail of tax avoidance, tax expenditures and tax evasion are widely believed to be important factors limiting revenue mobilization in the developing world. Further in developing countries in addition there is the international dimension of tax evasion via price distortions or transfer pricing, that is sending of overpriced imports into developing countries and underpriced exports from developing countries. This shifts incomes to the host countries of MNCs and results in revenue losses within the developing countries. And finally there are the tax haven countries and the “Swiss banks” which attract tax evaded incomes and shadow economy incomes from both developing and developed countries and this also leads to revenue losses for the state.
1. Lax tax collection: Adequate efforts are not put in to maximize tax collections. Small businesses, large volumes of unregistered or even illegal economic activities, evade taxes completely. It is estimated that in
the parallel economy is atleast 60% (conservative) to 150% of the legal/registered economy. If revenues were realized from this through efficient tax administration at least 50% more tax revenues would be generated. India
2. Corrupt Practices: Revenue officials like income tax officers, excise inspectors, customs collectors often are in league with businesses and individuals to facilitate tax evasion, including transfer pricing and transfers to tax havens ( it is estimated that the equivalent of India’s GDP is parked in “swiss banks” and this is mainly money belonging to the business elite and politicians from India). This results in huge losses to the state exchequer.
3. Tax Expenditures: Fiscal policies and decision making lead to concessions in taxes for selected individuals and businesses. The latest budget 2010-11 estimates that for the Central government alone these tax expenditures account for 85% of Tax revenues during 2009-10 and the trend is increasing (see Table below) – so a clear potential for doubling tax collections if most of these tax expenditures, especially for businesses are taken away.
4. Subsidies that are not declared as tax expenditures: Organisations registered as Trusts under the Public Trusts Act are exempt from tax payments. A large number of private educational institutions, hospitals, religious institutions etc operate as Trusts and accumulate huge surpluses. Such institutions are supposed to engage in charity and provide social benefits but the reality is that most of them do not and neither do the concerned government agencies monitor their financial transactions. So these are again clear losses of revenues for the state exchequer.
Table: Revenues Forgone (Tax Expenditures) during 2008-09 and 2009-10
– figures are INR crores (1 crore = 10 million) Central Government, India
Source: Govt. of
Budget 2010-11 India
To conclude, if the tax administration becomes more efficient, disciplined, and ethical at one level and most of the tax expenditures, especially the non-personal income tax, and other subsidies which do not provide effective social returns are done away with there is clear plausibility that India’s tax:gdp ratios should reach the level of over 35% (without increasing tax rates) and this would provide the “maximum available resources” to meet the ESCR commitments, especially universal school and college education, universal access to healthcare and universal access to housing.