India is one of the fastest-growing large economies in the world, helped by a demographic profile that supports its ambition to become a developed nation. With India on the brink of a transformative era, 2047 will mark the centenary of independence, with the promise of India becoming a developed economy. The prime minister’s vision is not merely aspirational but a clear call for concerted action across all sectors. While the rest of the world grapples with economic slowdowns and the challenges of ageing populations, India’s emergence as one of the fastest-growing large economies is boosted by its favourable demographics. This unique advantage will propel the country towards its ambitious goal of being a developed economy.
However, such an aspiration is fraught with challenges. Taxation will play a pivotal role in fostering inclusive growth and sustainable development. The three vital questions that have to be answered are what role should taxation play in propelling India towards this goal; how should the Indian taxation landscape evolve over the next two decades, and how can this vision be achieved?
Two significant measures will be the simplification of the tax laws and increasing the income tax base. These will have their own challenges, particularly within the vast informal sector. The difficulty of identifying individuals with disposable income is evident, as is the contentious issue of the taxation of certain income classes, such as agriculture.
Voluntary tax compliance is another avenue to explore. India’s existing schemes, such as earmarked taxes, could be expanded to enhance credibility and trust in the system, thus improving India’s dismal reputation. By informing taxpayers about the allocation of their contributions, such as funding for the Swachh Bharat or sanitation improvement project, the government may foster transparency and potentially increase voluntary compliance. The tax-to-GDP ratio, which measures the scope for social security contributions, is currently 11.1% and presents an opportunity for increasing social coverage, enhancing savings and ultimately driving growth.
However, implementing such measures necessitates significant technological advances by tax authorities, accompanied by sustained investment from the government. It is essential to view taxation not merely as a fiscal tool but as a means to sustain a robust social model. India’s social fabric is woven with persistent challenges of poverty, hunger, and stark inequalities. Addressing these issues is fundamental before expecting a more equitable tax-to-GDP ratio reflective of developmental aspirations.
It is worrying to see India’s absence from the 2024 OECD revenue statistics because of significantly low tax revenues. The population boom, coupled with the introduction of the goods and services tax (GST) and shifting economic dynamics, especially the decoupling from China, underscores the urgent need for reform. A tax-to-GDP ratio of 15% is the threshold necessary for funding development, a benchmark India must achieve.
The implementation of GST and property taxation are pivotal moves in achieving this objective. Property tax, in particular, is less regressive, easier to collect, and economically non-distorting. Cross-subsidisation through taxation serves as a tool for societal support, reinforcing the principle that taxation is integral to the fabric of a successful economy.
The discussion regarding tax incentives, such as R&D credits, production-linked schemes and lower corporate tax rates for the manufacturing sector, has to be nuanced. While these programmes may appear beneficial, they represent a notable cost to the exchequer. A rigorous cost-benefit analysis must guide the way the government handles such incentives, ensuring they yield tangible returns that resonate with India’s diverse population. As the country approaches India@100, its challenges are significant, but prospects are equally promising.
By reinventing the tax structure and committing to a holistic social model, India can follow a broad path towards becoming a developed economy. The journey will be defined by its ability to harness the demographic dividend, improve tax compliance and nurture an environment conducive to inclusive growth. This will be an endeavour not merely necessary but imperative to achieving a prosperous India.