The Tax System in India: Could Reform Spur Growth?
IMF Working Papers, April 1, 2006
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Bibliographic details
- Authors: Hélène Poirson
- Published: April 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451863536.001
Summary
- This paper assesses the effects of India's tax system on growth through the level and productivity of private investment.
- The paper compares India's indicators of effective tax rates and tax revenue productivity with other countries.
- The paper finds that the most recently proposed package of reforms would improve tax productivity and lower the marginal tax burden and tax-induced distortions.
- Caveat: firms that rely on internal sources of funds or face problems borrowing would continue to face high marginal tax rates.
Key findings on tax structure and performance
- The Indian tax system is characterized by:
- (1) a high dependence on indirect taxes,
- (2) low average effective tax rates and tax productivity, and
- (3) high marginal effective tax rates and large tax-induced distortions on investment and financing decisions.
- Subject coverage: Consumption taxes, Corporate income tax, Income and capital gains taxes, Income tax systems, Revenue administration.
- Keywords highlighted: excise, firm, tax burden, tax rate, VAT, WP.
Effects of proposed reforms
- The most recently proposed package of reforms would:
- improve tax productivity, and
- lower the marginal tax burden and tax-induced distortions.
- Remaining limitations after reforms:
- Firms relying on internal funds or facing borrowing constraints would still face high marginal tax rates.