OECD Economics Department Working Papers No. 1389 Making income and property Isabelle Joumard, taxes more growth-friendly Alastair Thomas, and redistributive in India Hermes Morgavi https://dx.doi.org/10.1787/5e542f11-en Unclassified ECO/WKP(2017)21 Organisation de Coopération et de Développement Économiques Organisation for Economic Co-operation and Development 02-Jun-2017 ___________________________________________________________________________________________ _____________ English - Or. English ECONOMICS DEPARTMENT Unclassified ECO /WKP(2017)21 MAKING INCOME AND PROPERTY TAXES MORE GROWTH-FRIENDLY AND REDISTRIBUTIVE IN INDIA ECONOMICS DEPARTMENT WORKING PAPERS No. 1389 By Isabelle Joumard, Alastair Thomas and Hermes Morgavi OECD Working Papers should not be reported as representing the official views of the OECD or of its member countries. The opinions expressed and arguments employed are those of the author(s). Authorised for publication by Alvaro Pereira, Director, Country Studies Branch, Economics Department. All Economics Department Working Papers are available at www.oecd.org/eco/workingpapers English JT03415233 Complete document available on OLIS in its original format - This document, as well as any data and map included herein, are without prejudice to the status of or sovereignty over any territory, to the Or. English delimitation of international frontiers and boundaries and to the name of any territory, city or area. ECO/WKP(2017)21 OECD Working Papers should not be reported as representing the official views of the OECD or of its member countries. The opinions expressed and arguments employed are those of the author(s). Working Papers describe preliminary results or research in progress by the author(s) and are published to stimulate discussion on a broad range of issues on which the OECD works. Comments on Working Papers are welcomed, and may be sent to OECD Economics Department, 2 Rue André-Pascal, 75775 Paris Cedex 16, France, or by e-mail to [email protected]. All Economics Department Working Papers are available at. www.oecd.org/eco/workingpapers This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. Latvia was not an OECD Member at the time of preparation of this publication. Accordingly, Latvia does not appear in the list of OECD Members and is not included in the zone aggregates. © OECD (2017) You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgment of OECD as source and copyright owner is given. All requests for commercial use and translation rights should be submitted to [email protected] 2 ECO/WKP(2017)21 ABSTRACT/RÉSUMÉ Making income and property taxes more growth-friendly and redistributive in India Tax reforms are crucial to promoting inclusive growth in India. The replacement of a myriad of consumption taxes by a Goods and Services Tax (GST) will boost India's competitiveness, investment, job creation and tax compliance. The potential to raise additional revenue from taxes on goods and services is however limited. In contrast, reforming income and property taxes should help to i) raise more revenue to finance much needed social and physical infrastructure while keeping public debt under control; ii) reduce inequality by increasing the redistributive effect of taxation; iii) promote productivity by reducing distortions in the allocation of resources which emanate from the corporate income tax; iv) boost job creation by eliminating the bias against labour- intensive activities; v) promote confidence, and thus investment, by improving clarity and certainty regarding tax rules and their application and vi) reinforce the ability of states and municipalities to provide key public infrastructure and services. This paper presents the main characteristics of the tax system as well as the rationale and options for reform. JEL codes: H20, H24, H25, H26, H71 Keywords: India, tax system, income tax, property tax, inheritance tax, tax administration, base erosion and profit shifting ***** Impôts sur le revenu et sur la propriété : les rendre plus propices à la croissance et en accentuer le caractère redistributif Les réformes fiscales sont essentielles pour renforcer la croissance inclusive. Le remplacement de nombreuses taxes à la consommation par une taxe sur la valeur ajoutée (Goods and Services Tax) va promouvoir la compétitivité, l’investissement, la création d’emplois et le respect des règles fiscales. En revanche, il ne devrait pas se traduire par une augmentation des recettes fiscales. Une réforme des impôts sur le revenu et sur la propriété pourrait : i) accroître les recettes fiscales et ainsi financer les besoins en infrastructures physiques et sociales tout en maintenant le niveau de la dette publique sous contrôle ; ii) réduire les inégalités en augmentant l’effet redistributif de l’impôt ; iii) engendrer des gains de productivité en réduisant les distorsions dans l’allocation des ressources inhérentes aux impôts pesant sur les entreprises ; iv) promouvoir la création d’emplois en éliminant le biais à l’encontre des activités intensives en main d’œuvre ; v) renforcer la confiance, et donc l’investissement, en rendant la législation fiscale et son application plus claires et prévisibles ; vi) améliorer la capacité des états et municipalités à offrir des services publics et infrastructure de base. Ce document présente les principales caractéristiques du système fiscal indien, les justifications et possibilités de réforme. Classification JEL : H20, H24, H25, H26, H71 Mots-clés : Inde, système fiscal, impôt sur le revenu, impôt sur la propriété, impôt sur les héritages, administration fiscale, érosion de la base d’imposition et transfert de bénéfices 3 ECO/WKP(2017)21 TABLE OF CONTENTS Main characteristics of the tax system ......................................................................................................... 6 Tax revenue is low while social and development needs are large .......................................................... 6 The current tax mix is inefficient ............................................................................................................. 8 Taxing powers of states and local governments need to increase .......................................................... 10 The personal income tax could raise more revenue and redistribute more ................................................ 11 Too few taxpayers .................................................................................................................................. 12 The personal income tax provides little progressivity ............................................................................ 14 Social security contributions penalise job creation in the formal sector .................................................... 16 Property taxes could help finance better municipal services ..................................................................... 17 Company taxation: cutting rates and broadening the base to boost firm growth and job creation ............ 19 A high corporate income tax rate with a narrow tax base ...................................................................... 19 The taxation of SMEs: reducing disincentives to grow and to incorporate ............................................ 24 International considerations: attracting foreign investors while addressing base erosion and profit shifting .................................................................................................................................................... 25 There is scope to improve the effectiveness of the tax administration and increase compliance .............. 29 Increasing certainty regarding tax rules and their application ................................................................ 30 Increasing the overall capacity of the tax administration ....................................................................... 31 REFERENCES .............................................................................................................................................. 35 Tables 1. Tax revenue: level and mix ................................................................................................................. 10 2. Reform options for raising more personal income tax revenue: 4 scenarios ...................................... 15 3. The average tax wedge decreases along the income ladder in India .................................................. 17 4. Major incentives granted to companies under the central government income tax ............................ 21 5. Tax depreciation rates and true economic depreciation rates for selected assets in India .................. 22 6. Tax rate for a resident versus a non-resident corporation ................................................................... 25 7. FDI inflows to India, 2014 .................................................................................................................