Taxation is a key tool for any government's economic strategy, funding critical infrastructure, social services, and public goods. The effectiveness of a tax system can be evaluated by looking at the return on investment (ROI) on taxes, which measures the benefits received by taxpayers in relation to the taxes they pay. We will discuss the ROI on taxes in India, particularly in light of the recent 2024 budget presented by Finance Minister Nirmala Sitharaman, and compare it with other countries.
India's Tax System and Recent Budget Highlights
India's tax system comprises direct taxes (like income tax) and indirect taxes (such as Goods and Services Tax or GST). In the Union Budget 2024, several key measures were introduced aimed at improving economic growth and public welfare:
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Infrastructure Development: Significant allocations were made for infrastructure projects, including new expressways, power plants, and airports, particularly in the eastern states under the Purvodaya scheme.
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Social Programs: Enhanced funding for social programs targeting women, youth, and marginalized communities was announced. For instance, the PM Awas Yojana received substantial allocations to build additional houses.
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Skilling and Education: A new centrally sponsored scheme for skilling was introduced, aiming to skill 20 lakh youth over five years, with upgraded Industrial Training Institutes (ITIs) ().
These initiatives aim to improve the quality of life and economic opportunities for Indian citizens, thereby increasing the ROI on taxes.
Comparative Tax Metrics
Tax-to-GDP Ratio:
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India's tax-to-GDP ratio is approximately 16.7%, which is lower than many developed countries. For example, OECD countries average over 30%, with Nordic countries like Denmark and Sweden exceeding 40%. This indicates that while India collects a significant amount of tax revenue, there is potential for increasing this ratio to enhance public services and infrastructure.
Personal Income Tax Rates:
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India's maximum marginal tax rate for individuals is around 42.744%, which is comparable to other high-tax countries such as Japan (55.97%), Finland (56.95%), and France (45%). However, countries like Hong Kong have much lower rates (around 15%), which impacts their tax revenues differently.
Global Comparisons
Nordic Countries:
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Countries like Denmark and Sweden, with high tax-to-GDP ratios, provide extensive social welfare services, including universal healthcare, free education, and generous unemployment benefits. This high ROI on taxes translates into high living standards and robust social security nets.
United States and Canada:
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The U.S. has a progressive tax system with a top marginal rate of 37%, while Canada’s is 33%. Both countries invest heavily in infrastructure and public services, though the extent and efficiency of these services can vary. For instance, Canada’s healthcare system, funded through taxes, offers comprehensive coverage to all citizens, leading to high ROI in terms of public health outcomes.
Singapore:
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With a lower tax rate (top marginal rate of 22%) but efficient tax administration, Singapore provides high-quality public services and infrastructure, demonstrating that lower tax rates do not necessarily mean lower ROI if the tax system is well-managed and corruption is minimized.
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Comparative Analysis
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OECD Countries:
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The average tax-to-GDP ratio in OECD countries is over 30%, with some countries like Denmark and Sweden exceeding 40%. These higher ratios reflect the extensive social welfare systems and public services provided in these countries. In contrast, India's lower tax-to-GDP ratio suggests limited fiscal capacity and public service delivery.
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Personal Income Tax Rates:
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India's maximum marginal tax rate for individuals is 42.744%, which is high compared to many other countries. For instance, the maximum tax rates in Canada, the USA, and the UK are 33%, 37%, and 45% respectively. Some countries like Hong Kong have much lower rates at around 15% .
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Public Services and Infrastructure:
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Countries with higher tax revenues generally provide more comprehensive public services. For example, Nordic countries, which have high tax-to-GDP ratios, offer extensive healthcare, education, and social security systems. These services contribute to a higher standard of living and better social outcomes. In comparison, India's public services, while improving, still lag behind in quality and reach.
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Administrative Efficiency:
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Efficient tax administration plays a significant role in enhancing ROI on taxes. Countries like Singapore and New Zealand have streamlined tax systems with high compliance rates, which ensures better utilization of tax revenues. India's tax administration has made strides with the implementation of Goods and Services Tax (GST) and digitization of tax processes, but challenges remain in improving compliance and reducing evasion.
Conclusion
The ROI on taxes in India shows promise but also highlights areas for improvement. The recent budget’s focus on infrastructure, social programs, and skilling aims to enhance this ROI. However, by examining the practices of other countries with higher tax-to-GDP ratios and efficient tax systems, India can further improve its tax collection and utilization strategies to provide better services and infrastructure to its citizens.
Understanding the balance between tax rates, tax-to-GDP ratio, and the efficient use of tax revenues is crucial for maximizing the benefits of taxes. As India continues to grow and develop, optimizing its tax system will be key to achieving higher ROI on taxes and improving the overall quality of life for its citizens.
Sources: Economic and Political Weekly, Live Mint, Hindustan Times, ET NOW