The reform of tax policy has a big role in India’s Viksit Bharat journey

This is not just from the perspective of funding higher levels of public expenditure that becoming a developed country will entail, but also in terms of the impact it will have on the investment and economic growth needed to help us achieve this vision.

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A developed India must have well-drafted and comprehensive tax laws, a taxpayer-friendly yet robust tax administration, a strong culture of compliance among taxpayers and effective dispute prevention and resolution mechanisms.

From a quantitative perspective, our tax-to-GDP ratio will have to be much higher, perhaps as much as 30%, as India’s revenue secretary recently said. We currently have a tax-GDP ratio of about 18% (counting both central and state taxes).

To put this in perspective, China and the US have a ratio of about 21% and 25%, respectively.

Achieving this economic goal will not be easy, since many tools that other countries deploy to boost compliance and collections have already been tried in India with varying degrees of success.

Widening the tax base by phasing out exemptions and deductions may not help, since there are few exemptions and deductions left today. Similarly, the scope of tax deducted at source (TDS) and tax collected at source (TCS) have already been expanded to a point where they cover virtually all payments. 

So, what can be done on the tax front to enable a Viksit Bharat?

Also Read: Tax action in the Union budget for 2025-26 could set the course for Viksit Bharat

To start with, there must be a significant and sustained push for greater formalization of the economy. Some estimates suggest that India’s informal economy could be as large as 30% of GDP. Bringing this within our tax net can go a long way in meeting our revenue needs and easing the pressure on existing taxpayers. 

This can be done with the help of a two-pronged approach.

First, some of the disincentives associated with normalization should be addressed. For example, by addressing the regulatory burden that small units deal with. Reduced frequency of filings and an increased focus on self-declaration instead of inspections could be considered.

Similarly, efforts should be made to highlight the benefits of joining the formal economy, such as those related to improved access to credit or government procurement programmes. Judicial reforms can help in faster enforcement of contracts and encourage formalization. 

As India’s economy grows, the country’s tax laws will need to be detailed and precisely crafted. The ongoing review of the income tax law is a welcome step in this direction. 

Many provisions of the present law were drafted in an era when foreign businesses and investors had minimal interaction with the Indian economy. As a result, numerous areas in the law, including those dealing with compliance obligations, restructuring and taxation of partnerships, do not address scenarios involving foreign entities or overseas transactions by residents at all.

Also Read: Time for India to revamp the Income Tax Act and ease compliance burdens

There are also areas where the law has not kept pace with commercial changes. These issues should be addressed rather than left for the judiciary to resolve through lengthy litigation. 

The government should also take a pragmatic view when it comes to the interpretation and enforcement of tax treaties. Treaty obligations are reciprocal, and with India Inc increasing its outbound forays, our approach to treaty interpretation must be aligned with global norms. 

Export growth will also play a vital role in our journey to a Viksit Bharat. India aspires to achieve a target of $1 trillion in merchandise exports in the next six years, which will require significant expansion of India’s manufacturing sector.

To facilitate this, the sunset date applicable to the 15% special tax rate offered to manufacturers should be removed and this regime should be made a permanent feature of India’s tax system.

Similarly, a rationalization of GST rates should be taken up on priority. This will help mitigate complexity and address classification disputes arising from multiple rate slabs. 

Also Read: Simplify India’s GST regime: The case for it is clear and it’s time to act

From an administrative perspective, faster resolution of disputes should be a priority as it can help eliminate uncertainty for taxpayers and enable the government to recover revenue that may otherwise remain stuck in litigation.

For this, statutorily mandated timelines, an overhaul of the advance ruling process and enabling negotiated settlement of disputes can be considered. 

India’s transformation into Viksit Bharat may have a two-decade horizon, but its foundation needs to be laid now. Since tax is an important component of this foundation, we have no time to lose.

The author is partner, Price Waterhouse & Company.