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IMF recipe for fiscal consolidation in India: Higher personal income tax, lower corporate tax

By Our Representative
The International Monetary Fund (IMF), the world’s powerful banker, has strongly favoured a sharp rise in personal income tax in India, even as simultaneously bringing down corporate taxes. In a policy paper released this month, the IMF believes this is one of the major steps Government of India requires to take in order to bring about fiscal consolidation.
Released by IMF’s office of the executive director, and authored by Rakesh Mohan and Muneesh Kapur, the paper, titled, “Pressing the Indian Growth Accelerator: Policy Imperatives”, says, “A comparison of India with Organization of Economic Cooperation and Development (OECD) countries indicates that the corporate tax revenues in India are higher than in the OECD (3.6% to GDP versus 3% in 2011)."
In contrast, it adds, "The personal income tax revenues in India are found to be significantly lower than OECD (1.8% to GDP versus 8.5% in 2011.” OECD is the international forum of developed countries meant to consult each other on economic issues facing the world.
The IMF’s policy paper acquires significance, as it comes close on the heels of the new Union budget, which has sought to be lower corporate tax to 25 over the next five years. The paper was released just ahead of IMF managing-director Christine Lagarde’s meeting with Prime Minister Narendra Modi on March 16.
The authors say, “Low income levels in India can partly explain the relatively low personal income tax collections in India”, yet insist, “It appears that the income tax rates are also notably lower in the Indian context. This is true for both the peak income tax rate as well as the income thresholds at which the various tax rates kick in.”
Giving example, the authors say, “The peak income tax rate in India was 30% in 2013, whereas it averaged 36% in the OECD countries; in as many as 15 OECD countries, the peak personal income tax rate was 40% and above. Also, the minimum income tax rate averages 10% in the OECD countries vis-à-vis zero on India, although this specific comparison is complicated by differences in basic exemptions and credits across countries.”
Turning to the income thresholds levels, the authors say, “The peak income tax rate in India is applicable to annual incomes of Rs 1 million and above, i.e., almost 11 times the per capita income in 2013. The corresponding OECD average was 4 times the per capita income.”
They further say, “As regards corporate taxes, the Indian tax rate is somewhat higher than that in the OECD countries”, complimenting the recent Government of India move in the Union budget 2015-16 for addressing “this issue through reduction in the corporate tax rate to 25% over the next four years, accompanied with rationalization and removal of various exemptions and incentives.”
Arguing in favour of sharply increasing the personal income tax net, the authors say, “The category of taxpayers with incomes above Rs 1 million normally gets substantial dividend income, which is currently tax-free in the hands of the investor as the company distributing dividend pays dividend distribution tax at the rate of 15%.”
Hence, according to them, the need is for taxing such “high income individuals”, who are currently taxed at a “lower overall effective marginal rate than those having little or no dividend income”. They argue, “The need to focus on expanding this category of taxpayer base, therefore, is crucial.” This could be done by raising the “the peak income tax rate in India of 30%” which is “well-below that in the OECD countries.”

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