India must move quickly to overhaul its tax system if it is to succeed in pursuing an inclusive growth agenda and maintain its position as the G20's fastest-growing economy, the Organization for Economic Co-operation and Development (OECD) has said.
In its annual economic survey, the multi-country forum praised India's continued economic growth, which, at 7.5 percent, was the highest level of G20 countries; however, it urged the Indian government to focus on tax reforms to ensure wealth is distributed more evenly across what is a famously economically imbalanced society.
"The tax-to-GDP (Gross Domestic Product) ratio is low and the tax system has little redistributive impact. Few people pay income taxes and property taxes are low. Meeting social and development needs will require raising more revenue from property and personal income taxes," the OECD said in its report.
At 16.9 percent of GDP in 2015-16, India's tax take is one of the lowest amongst emerging economies, including major BRICs rivals China (18.5 percent) and Brazil (33 percent). It is slightly ahead of Russia's 15 percent.
India also suffers higher inequality levels in GDP per capita than Brazil and Russia, according to the OECD.
"Spatial disparities in living standards are large," it said in the report, pointing to a need for more accommodative business taxation to promote investment and counter tax evasion.
"Creating a business-friendly tax environment is key to promoting investment, to raising India's competitiveness and to creating more jobs. The statutory corporate income tax (CIT) rate, 30 percent plus surcharges adding to 34.6 percent for resident companies, is high by international standards. Enterprise surveys suggest that the high CIT rate is a major obstacle to business development."
The Indian government, led by Prime Minister Narendra Modi, is currently undergoing a wave of reforms, which include plans for a gradual reduction in the corporate income tax from 30 percent to 25 percent. It also plans to implement a new Goods and Services Tax to support growth and a broadening the tax base.
While these measures will go some way in addressing the country's low tax-to-GDP ratio, the OECD said that the government must also address the low levels of personal income tax and property tax.
At present, only 5.6 percent of the population pay personal income tax, a very low share by international standards.
"Property and personal income taxes, which are paid by very few people, could be reformed to raise more revenue, promote social justice and empower sub-national governments to better respond to local needs."
The OECD report also called for greater municipal powers to enable individual states to improve the ease of doing business and facilitate more balanced regional development.