India's inefficient tax collection methodology – a review is needed!
Homeyar Jal Tavaria is a professional accountant with interest in the science of accounts and audit, observer and commentator on macro economic commercial, financial and economic events, occasional blogger'. LESS ... MORE
The main heads of tax collection in India are Income Tax, Goods & Services Tax (GST), excise duty, customs duty, and securities transaction tax (STT).
There is enough empirical data to show that our tax collection mechanism is faulty and there is definitely serious tax evasion at both the direct tax (income tax) and indirect tax ends (mainly GST).
For the purpose of better understanding, we need to break up the 2 main heads of tax collection (income tax on sources of income – different income heads) and GST tax – on consumption of goods and services.
We are all aware of the anomalies and failures of income tax. Certain types of income (agriculture income) are fully exempt, significant number of PAN Card holders do not file income tax returns.
Also, one can be reasonably sure that the maximum payment of income tax (% of income tax payable to taxable income) is in the middle tier. The bottom tier % of income tax paid will be low because of progressive taxation rates and allowed tax deductions, while the upper tier manages the taxability of income very well, exploiting the exemptions and set offs extremely well.
Similarly, we seem to be having some issues with GST collection. The geographical states spread across India and GST collections from those states linked with the Gross State Domestic Product (GSDP – cumulative being national GDP) are giving surprising results.
Note – there is not much available in the public domain on GST collection details in terms of applicable years and geography (state contribution). However, whatever data is available is raising plenty of issues on the quality of GST tax collection and the need to really review the entire tax collection and tax payment system.
For the year 2024/25, the Top 10 GST paying states of India and the GSDP generated by them for the year 2023/24 are as under. Note that the data years are different, but the issue of concern being raised does not get really impacted. Details are as under:
State Rank
Name of State
GST collected / GSDP values – %
GST collected – Rs Billions 2024/25
GSDP generated – Rs Billions 2023/24
1.
Maharashtra
7.88
3184.97
40443.00
2.
Gujarat
7.94
1749.38
22034.00
3.
Karnataka
5.72
1430.23
25007.00
4.
Tamil Nadu
4.13
1124.56
27216.00
5.
Uttar Pradesh
4.15
1057.89
25479.00
6.
Haryana
9.98
982.34
9841.00
7.
West Bengal
5.72
876.54
15318.00
8.
Rajasthan
5.64
765.43
13579.00
9.
Telangana
4.99
654.32
13118.00
10.
Andhra Pradesh
4.16
543.21
13035.00
Notes:
GST being a consumption-based tax, one would have thought that the states GST collected and GSDP generated % would largely be in one narrow band as percentages. That is not the case per the data above.
There are 3 percentage bands coming up –
More than 7.5% (GST / GSDP %) – states contributing Maharashtra, Gujarat, Haryana
Between 5% to 7.5% – states contributing are Karnataka, West Bengal, and Rajasthan
Below 5% – states contributing being Tamil Nadu, Uttar Pradesh, Telangana, Andhra Pradesh.
The Western India states of Maharashtra and Gujarat are in the top contributors, while surprisingly, the Southern India states of Tamil Nadu, Telangana, Andhra Pradesh are the laggards. Such a big differential in GST contribution % needs to be looked into.
The North India and East India states need to shake off their lethargy and become worthwhile indirect tax (GST) contributors.
It would help to analyse why certain states have such low GST contributions as % of GSDP. There is a mine available to be exploited.
India has to significantly upgrade its GST tax collection mechanism. The above collection % differential highlights that the tax collection structure needs a review.
India cannot be sanguine that the direct and indirect tax collections are buoyant. The buoyancy is on a weak foundation base, and the tax structure needs a major relook to keep the buoyancy going and ensure that all are caught in the tax net so that the taxes can be called fair and equitable taxes. Fair and equitable taxes ensure that businesses are operating on a level playing field.
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