India's tax reforms could make growth more inclusive, OECD says

Organisation for Economic Co-operation and Development (OECD) on Tuesday released its Economic Survey of India and said that it estimates India's GDP growth to be at 7% for current fiscal, 7.3% in FY18 and 7.7% in FY19.

OECD said, "Economic growth of around 7.5% makes India the fastest-growing G20 economy. The acceleration of structural reforms, the move towards a rule-based policy framework and low commodity prices have provided a strong growth impetus."

It further said government debt to GDP ratio has increased in India and it must return to a declining path. OECD suggested that the government must raise more revenue, especially from property and personal income taxes. 

Finance Minister Arun Jaitley on February 1, 2017 relaxed income tax rules for people earning between Rs 2.5 lakh to Rs 5 lakh per year. 

OECD said that although strong growth has raised incomes and reduced poverty, inequalities in the country continue to widen. 

It said, "Growth has become more inclusive as about 140 million people have been taken out of poverty in less than 10 years. However, may Indians still lack access to core public services, such as electricity and sanitation."

It also said, "India is growing fast, but private investment is weak," adding, "A comprehensive tax reform should help to raise more revenue to finance much needed social and physical infrastructure, promote corporate investment, enable more effective redistribution and strengthen the ability of states and municipalities to better respond to local needs."

Demonetisation

OECD said that demonetisation has complemented the many initiatives recently taken by the government to fight against corruption and the so-called "black money" and to reduce tax evasion.

It said, "Implementing the demonetisation has had transitory and short-term costs but should have long-term benefits."

Income Tax

Isabelle Joumard, Head of the India desk, OECD Economics Department, said, "Less than 6% of the population pay the personal income tax, which is a very low share by international standards. An individual does not pay any income tax until income is around 2½ times the average wage in the organised/formal sector, a much high level than most other emerging economies and OECD countries."

It suggested that that bringing the personal income tax schedule in line with other emerging economies and scrapping tax concessions would increase personal income tax revenue by about 50%. 

"A comprehensive reform of property, personal income and corporate taxes is needed to complement the GST reform. It should aim at raising more revenue to fund social and physical infrastructure in a way that support economic growth, promote social justice and empower sub-national governments to better respond to local needs," the survey said.

Further, the report said that the regional disparities are high as there is "little" evidence that poor states are catching up.