Why is India's Tax System So Bad?

India's tax system faces significant challenges primarily due to its complexity and the frequent changes in tax policies. The implementation of the Goods and Services Tax (GST) and the coexistence of other taxation systems such as income and corporate tax have made tax compliance a daunting task. High tax rates can be a significant deterrent to compliance, while bureaucratic inefficiencies often lead to inefficient service delivery and increased administrative costs. Furthermore, inadequate tax enforcement and a narrow tax base contribute to a limited revenue collection.

Emerging from these issues, it is important to consider potential solutions such as streamlining the tax structure, enhancing digitalization, and strengthening tax enforcement. A simplified and more efficient tax system could significantly improve the revenue generation and overall economic stability of India.

India's Increasing Debt and the Impact on Taxation

India's rising debt levels have significant implications for its tax policies and future economic performance. The country has seen a substantial increase in debt from 2014 to 2023, according to the following data:

2014: ?54 lakh crore 2023: ?205 lakh crore

These numbers indicate that the Indian government is increasingly reliant on debt to fund its operations. However, the way in which debt is utilized is critical in determining its impact on the economy. Here are some key points to consider:

Understanding Good vs. Bad Debt

Debt is often classified as either good or bad. Generally, debt is considered productive and beneficial if it is used to finance the acquisition of assets that can generate returns. For example, borrowing to buy consumer gadgets like an iPhone may not be a smart move, while borrowing to buy property could be considered a productive investment.

Similarly, when a country takes on debt to fund the construction of productive assets, it is often seen as good debt. To determine whether the debt is being used productively or unproductively, several indicators can be used. These include:

Indicators of Productive Debt

Borrowing as a % of GDP:
Since 2005, the ratio has been decreasing from around 63 to 45 in 2023. This suggests a reduction in reliance on debt, which can be seen as a positive sign. External Borrowing as a % of GDP:
While external borrowing has remained around 20 over the years, it indicates that the majority of the borrowing is happening domestically, which could be more stabilizing for the economy. Gross Fixed Capital Formation (GFCF):
This measures the amount of money being invested productive assets rather than consumed. Currently, GFCF in India has been decreasing from 36 in 2008 to around 28, indicating a shift towards unproductive spending.

These factors highlight the need for careful management of debt to ensure that it is being used for productive purposes. If these trends continue, it is likely that future taxation levels will rise and inflation could increase significantly.

Conclusion

The critical challenge for India is to balance its debt management and ensure that borrowing is channeled towards productive assets. Streamlining the tax system and improving enforcement can help achieve this goal. Understanding how to deal with higher inflation and future proofing investments will be crucial for individuals and policymakers. By making informed decisions and focusing on productive investments, India can enhance its economic resilience and sustainable growth in the face of increasing debt.