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Jeremy Hetherington-Gore Unleashed
10 August, 2008

India's reported near-50% growth in direct tax collections so far this year is a stunning figure indeed, but has to be seen in context: tax collections in total amount to a mere 10% of GNP, and of that about 40% is made up of direct taxes. So the increase represents about 2% of GNP, and last year's fiscal deficit was 7%, the lowest it has been for a while. The government isn't going to be swimming in rupees just yet!

Robust growth in direct tax collections is a result of tax education and compliance mechanisms put in place by the Income Tax department, says the Ministry of Finance. That is no doubt the case; but an even more stunning figure is that fewer than 5% of Indians pay tax at all.

India is handicapped by one of the world's most entrenched and labyrinthine bureaucracies, as anyone will know who has had dealings with officialdom. In addition, India is a federal state, with all that implies for internecine warfare between the central government and provincial governments, particularly as regards tax collection.

Imagine being at the helm of a ship: you turn the wheel, but nothing happens. After a few minutes you send a petty officer to find out what's going on. 'Oh', he reports when he comes back, 'They don't want to go to port today, and anyway they're having tea right now.' That's what it's like to be the Indian Finance Minister.

It's that 5% figure which really matters, and that's one of the reasons the central government is trying so hard to impose a nation-wide Goods and Services Tax, which will create tax-paying relationships between the state and the swarms of traders who can currently play ducks and drakes with the balkanized provincial VAT system. It's a mighty task.


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Jeremy Hetherington-Gore Unleashed

Jeremy tackles the difficult issues head on!

 

 

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