Reliance on direct taxes in India on decline: Economic Survey

The Economic Survey 2017-18 highlighted that there has been a decline in the reliance on direct taxes in India which contribute only around 35 per cent of total taxes as against a contribution of about 70 per cent in Europe.

"Unlike in other countries, reliance on direct taxes in India seems to be declining, a trend that will be reinforced if the Goods and Services Tax (GST) proves to be a buoyant source of revenue," the Survey tabled in Parliament on Monday by Finance Minister Arun Jaitley stated.

The Survey underlined that fiscal decentralisation captures the idea that spending and tax decisions must reflect local preferences as far as possible.

"However, in India the states generate very low share of about 6 per cent of their revenue from direct taxes while the figure is 19 per cent in Brazil and 44 per cent in Germany," said the Survey.

According to the Survey, in the third tier, rural local governments in India generate only 6 per cent of revenues from own resources compared to 40 per cent in Brazil and Germany.

It stated that India's urban local governments are much closer to international norms collecting 18 per cent of total revenues from direct taxes compared to 19 per cent in Brazil and 26 per cent in Germany.

"Further, urban local governments in India generate 44 per cent of their total revenue from own sources. This is evident that urban local governments have emerged more fiscally empowered than rural local government in India," the Survey pointed out.

The Survey revealed that low level of tax collections by the local governments in rural areas is posing challenge in reconciling fiscal federalism and accountability.

It said panchayats received 95 per cent of their revenues from the devolved funds from the centre/state while generating only 5 per cent from own resources.

"Panchayats in states like Kerala, Andhra Pradesh and Karnataka do collect some direct taxes while villages in states like Uttar Pradesh almost entirely depend on transfer funds," highlighted the Survey.

"This is because some state governments have not devolved enough taxation powers to the Panchayats -- permissible taxes for Panchayats include property and entertainment taxes but not land taxes or tolls on roads," it said.

The Survey added that the local governments in India in tier II and tier III states do not fully utilise existing taxation powers and therefore generate less tax resources and collect less direct taxes as they rely much more on devolved resources.

--IANS

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