If administrative efficiency cannot be improved, better explore alternative revenue sources and probably look forward to a single Goods and Services Tax (GST) in future if the VAT system is successful.India’s gross tax revenue has grown at a faster pace than its GDP for the last eight years. Gross tax revenue–to–GDP ratio increased steadily from 8.97% in 2000-01 to 10.30% in 2005-06. As per the government’s revised estimates, it would further improve to 11.41% in 2006-07 and would touch the 12% mark in 2007-08. The rise in the ratio can be attributed to the rising profitability of Corporate India and the increasing share of the tax paying sections of the economy.

Personal Income tax collection is estimated to have grown sharply in the current fiscal because of more and more people coming under the ambit of income tax and moving up in the tax brackets with rising income levels. At the same time, according to report titled Doing business in South Asia in 2007 published by IFC and World Bank, India ranks 158th on the ease of paying taxes, well below the South Asian average. The report also says that business in India spend 264 hours per year complying with tax requirements and tax regime requiring 59 separate payments per year. The Investment Climate Surveys conducted in India have consistently identified tax compliance as a significant obstacle to business. Looking at the above two unparalleled views, it may not be that simple to conclude whether personal income tax should be abolished in India. The next few sections in this article would quest for the answer to the above question.

India is keen on joining the league of developed countries by 2020 as per the stated objective of the Government a couple of years ago. But with targets of the tax-to-GDP ratio not reaching the satisfactory mark, the Indian tax authorities have a Herculean task ahead to push up the ratio. Recent changes in tax-to-GDP ratios in many countries reflect the combined impact of changes in economic growth and lower rates of taxation on personal and corporate income. India as a country is also following a similar path.

From Exhibit I, it is evident that if at all Government wants to achieve the target tax-to-GDP ratio, it has to increase the revenue collection from direct taxes. For the first time, direct taxes—mainly those on personal income and corporate profits—will constitute almost half of the Centre’s gross tax revenues.

Effective Executive Magazine, Goods and Services Tax, GST, VAT system, India’s Gross Tax, Gross Tax Revenue, Gross Domestic Products, GDP, Global Service Tax System, Investment Analysis and Portfolio Management, Income Tax, International Finance Corporation, IFC, World Bank.