The development of India, or its non-development relative to China, is a topic that helps explain many issues that could come up in a Unit 4 question.
There are many aspects of the Indian economy that could impede its ability to grow, notably its lack (or should that be 'lakh'?) of coal.
This clip from Reuters gives an insight into the nature of the problem:
Benjamin Franklin famously said that the only things for certain in life were death and taxes. In India, many people believe in an afterlife, and that taxes can be easily avoided. News that the Indian economy continues to slow, with an ever-widening budget deficit, has brought discussion about the country’s current tax system and collection.
India’s tax system is complex. VAT is set by individual states and the rate varies from 4/5% to a general rate of 12%- this falls to 1% on gold, silver and precious stones (which are often used as a form of saving). There is also a service tax paid on most goods and services in malls and higher end shops; customs duty, on imports; an ‘octroi’ tax paid by goods moved from other states to Mumbai; an entertainment tax, for example on cinema tickets- big business in India; a luxury tax paid at high end stores and hotels; as well as a terminal tax on passengers and goods being transported. The list goes on.
How some of these meet Adam Smith’s canons of taxation is debatable. The focus is on targeting wealthier Indians, who can pay. But if I stay at a high-end hotel, it is fairly easy to pay cash and bargain down to avoid the luxury tax.
Income tax is progressive, with a top rate of 30%, though only 2.5% of Indians pay it. Corporation tax is in line with the international average at around 34%.
The system is built to try and raise as much money as possible through the addition of a variety of different taxes rather than better efforts at collection.
India needs to collect more taxes to support the urgent infrastructure improvements it needs to make to continue to attract foreign firms and to support growth. This is especially the case with electricity supply in northern India still subject to failure and the road transport system being terribly congested. FDI into the service sector fell by 90% in the 9 months to January 2014.
Data from www.tradingeconomics.com shows that taxation was only 10.39% of GDP in 2013, compared to 35.6% in the UK, 26.9% in the US and 45.8% in Sweden.
So what can India do?
There is almost universal agreement that the system must be simplified, with the likely next Prime Minister, Narendra Modi, discussing a General Sales Tax to replace some existing indirect taxes.
The Laffer Curve suggests that as tax rates rise, there is an optimal level of tax beyond which tax receipts start to fall.
India’s tax receipts have been rising, suggesting the optimal rate is yet to be reached. India’s problem is really tax avoidance- 40% of the country’s revenues come from Mumbai alone.
It is estimated the size of ‘Black Money’ is up to 30% of GDP and mostly held abroad. India recently did a deal with Switzerland, hoping for access to the US$1bn held in accounts there. Modi has even suggested abolishing income tax, which might lead to some of this money being kept onshore and therefore spent, supporting growth and paying indirect tax.
Indian notes printed before 2005 will also shortly cease to become legal tender. The newer notes can more easily be tracked, again helping to tackle tax avoidance and money being moved offshore.
There is a good supporting video http://www.timesnow.tv/Black-money-comes-mainly-from-India-Assange/videoshow/4371493.cms
The full list of taxes is here: http://indiabudget.nic.in/ub2013-14/rec/tr.pdf
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