Thank you very much for inviting me here today. It is. It's an honor to. I think the slides. Okay. It's an honor to be here. It is also with great pleasure I've been seeing the awards that the various states have been given. The idea that we recognize states which are doing good work and present the success story for everybody else to take home lessons is a wonderful idea. So congratulations to you sir on that idea. I'm honored that you've asked me to be here today.

I would like to take 10, 15 minutes to talk a little bit about the way we the question about how we finance growth and development. As Mr. Kochhar spoke in the morning. Democracy is about negotiation for us. The federal structure is about a system where center collects a lot of revenue where the states spend a larger share to states collectible about 35% of revenue but spend about 60%.

And we do observe that there is a large role, larger growing role we are assigning to the states. We are expecting them to develop visions for growth. A lot of the states are developing their own Viksit Bharat State versions. And so ultimately we come down to the elephant in the room. How do we finance it? We can borrow, but there's only limited space. Given all, we have all committed ourselves to FRBM. So then the story comes back to taxes.

And so we'll spend 10, 15 minutes talking a little bit about what reforms in taxation has meant for India, how far we have come in our effort to raise revenues and what might be the challenges going forward. I hope this is visible. Basically, the slide is showing you the tax-to-GDP ratio of the states and the center. The big takeaway from the slide is that the revenues of the states have been more or less steadily increasing. They've gone up from about 4%, a little over 4% to 7% over the last 20, 35 years from 1980 onwards.

In contrast, while centre raises a lot more revenue, it raises two thirds of the revenues in the country. The revenue profile of the centre is more volatile. There are big ups and there are also big downward movements. The idea that we need to improve our tax-to-GDP ratio has been a part of our discourse. Everybody, every tax reform commission has spoken about it, every finance commission has spoken about it, every plan document has spoken about it. So there is no controversy, there is no disagreement on that broad idea.

What if you look at Union Government's tax-to-GDP ratio in terms of direct taxes, which is income tax and corporate tax vis-à-vis indirect taxes. The big story from this slide is that the share of direct taxes has gone up, the share of indirect taxes has gone down. Indirect taxes includes at this moment GST and customs. Earlier it would include excise duty, service tax and customs. What you will also observe is that post 2007-08 direct taxes are not that buoyant. So the trend is flat. So till 2008 income taxes show a clear consistent growth. Thereafter it is not there.

So what is it that our tax reforms commissions have given? Given. So big picture, we have increased. If you go back to the earlier slide, we have increased from less than 14% to 18 and a half percent. So we have had about 5 percentage point growth in our tax-to-GDP ratio over a 45 year period. If you look at the lines, the vertical lines, they present for us, identify for us the major periods of reform.

So the first line represents the introduction of MODVAT. That was 1987. The idea of MODVAT was there is too much cascading in the system. So we should reduce cascading. So therefore we should give tax credit. The advantage is it creates a more efficient tax system. The disadvantage is it reduces the amount of revenues you collect. It caps the amount of revenues you collect.

1991 is the second vertical line that you see. And that is the period when we undertook major reforms. It's referred to as Chelliah Committee on tax reforms. There were reforms in income. Tax rates were brought down. There were many slabs. We got it down to four slabs. The peak rate was brought down. The customs duties were brought down as a measure of improvement efficiency in the economy.

In terms of tax-to-GDP ratio. However, you will see that decade brought the tax-to-GDP ratio down. We didn't actually see an improvement. So there is economic growth, there's better efficiency, but that does not directly translate into revenues. The period from 2001 to 2007-08 is considered an outlier for India. A period of very high growth but also very high sharp increases in corporate tax collections.

And what drives this large part of the driver seem to have been related to IT sector IT adoption in the corporate tax administration. So there were tax administration driven improvements which led to a huge increase in tax-to-GDP ratio. If you look at 2007 onwards, there is again a decline. And this is the period when global financial crisis required the government to do macro stabilization in the form of fiscal incentives. So we reduced our excise duty rates and that brought down our tax-to-GDP ratios. Thereafter you will find that it sort of fluctuates around that broad trend. There are ups and downs.

If you look at the last vertical line, that is 2017-18, that's the introduction of GST. Once again, GST is introduced as a way to do a more efficient tax system. It was intended only to be revenue neutral. In the initial years there were a few hiccups. So we were not revenue neutral. And that followed those initial years we also saw the impact of COVID. So we had a drop in revenue collections alongside 2019.

I haven't flagged it for you. Here is also the year when the Union government introduced the alternative scheme of taxation for corporate taxes. So there is an alternative to tax regime available which implies a lower tax liability. Once again, observe tax-to-GDP ratio falls. When we are announcing big changes in our tax system where we are aiming for efficiency and simplification, rationalization and simplification. There are a few quotes. I will skip them because I promise to take about 15, 15 minutes. I don't want to overshoot my time.

The broad idea is that most of our tax reforms identified the challenge in the economy as a tax system which is not encouraging investment, creating distortions. And we wanted to clean it out with the idea, with the hope that we get better efficient economic functioning. So then, what is it we are missing? We seem to be missing something crucial. What is it we are missing to think about? Increases in tax-to-GDP ratio? Perhaps we have to talk about changes in the tax base. The average educated person on the street today, if you ask them if we would like a higher tax-to-GDP ratio, the answer is yes, but please find somebody else to tax. The idea is that not all of us are paying enough tax. There are people who are outside the system. So the identification of the missing taxpayer seems to have become a critical issue.

So there are two ways of changing the tax base. One is to reduce exemptions and concessions. If you look at this slide, this is your revenue foregone, which is a reflection of how much incentive the system provides. Corporate tax we have actually reduced our exemptions and concessions. So you see the blue line which goes down in personal income tax. However, we have gone back and forth, so we haven't been consistent. We have brought in a new tax regime now for personal income tax as well. What does the new regime do for both corporate tax and personal income tax? We are proposing a regime which says that that you can choose a regime with higher taxes and exemption or you can choose a regime with no exemptions and lower tax rate. How do you think the taxpayers divide themselves? People who can avail exemptions, choose the higher rate but pay lower tax. People who think that that regime doesn't give them good opportunity go to the other regime. So in both cases we reduce the amount of revenues we are collecting.

We hope efficiency improves, we hope investments happen. But so far we haven't seen those positive effects trickle down. The second element in the story is to bring in new sectors under tax. In services, we did a big job. 1994 is when we started bringing services under the tax base. By the time we came to 2003-04 we had got a comprehensive coverage of services and GST actually brought in a structural and more efficient system of taxation. The big elephant in the room therefore is agriculture. There are indirect taxes on agriculture, but direct taxes on agriculture don't apply. As a tax country, we have to have a sense of whether this differentiation between agriculture and non agriculture is useful for us or is it problematic. That's a policy question that we need to think about. There are no clear answers on whether we should step this way or that way. But we need to think about.

The other important thing is how to improve compliance. And what do we mean by that? How do we improve the extent of formalization in the economy? We describe India as an informal, large informal sector, which means there are many agents in the country who think being part of the tax system is not useful. It can be MSME, it can be small manufacturers. There is the benefits of being in the tax system and the cost of being in the tax system don't work out. So perhaps instead of trying to reform the tax system, we have to go back to the drawing board to ask what is it that they are looking for in the formal economy and see if we can sort that out. Credit is usually presented as one element in that story. Finally, there are perceptions of how high tax and unfair tax, which creates problems. Income tax rates change every few years. The latest one we've just observed where we increase the exemption threshold to 12 lakhs.

If you're in the new regime, what drives these increases? On the one side, we argue that we have very few people who pay taxes. So the few people who do pay taxes feel aggrieved that they are unfairly being made to pay tax. So every few years the central government has feels the need to assuage this concern and raise the exemption threshold which continues to keep the number of taxpayers small. So do we have to think of a way of cracking this disparity? I will just take two more minutes of your time and I'll stop. We did a small survey, very small, hundred odd people, and we were trying to understand what people's perceptions are. And I've picked out two slides out of that to highlight two points to you. This slide is trying to present a juxtaposition of two questions. We are asking people, is the amount of tax you paid fair or too much? And we are asking on the other side, are there deductions in the tax feature regime that you can avail to reduce your liability?

I've circled through numbers. Those are the big clusters of people. There is one large chunk of people who believe that the amount of tax they pay is fair. And there are some exemptions available so they are satisfied with the system. And there are others who argue they pay too much and they don't want exemptions and they want lower rates of tax. So we have two separate groups arguing for completely different things from the tax structure. Finally, last slide, I promise I stop there. The question was asked, why do you think people evade tax and people who are allowed to choose multiple options. The choice which brought the most votes, let's call them, is the taxes are too high when compared to the benefits people are getting and government does not providing services which people think are important. What this means is we have to do a better job of communicating what the money is doing. It is not that governments don't do enough, but if we differentiate, if we can communicate better on what is being achieved through the revenues being raised, we perhaps have a better sense of how to satisfy the needs of the citizen in the country. I'll stop there. Thank you.

Participants at the Intersection of Democracy: Federalism Finance and Development