If India can bring down the total number of payments to 10 and the total hours to comply to 160, even without changing the total tax rate, the ‘paying taxes’ rank could jump by over a hundred positions to the 60s.
The latest ‘Ease of Doing Business’ report of the World Bank Group was released this week. Once again, everyone waited with bated breath to see how many ranks India jumps up in the list of 190 countries. Once again, everyone has been left disappointed; India climbed just one position to 130 this year.
Prime Minister Narendra Modi raised the stakes two years ago when he declared, rather sanguinely, that India will move to the top 50 positions within a couple of years. Clearly, that optimistic confidence was unjustified, mainly because perhaps no one briefed him that it is quite a complex exercise to implement specific reforms that will favourably impact the ‘doing business’ indicators. It is particularly complex in India, where gigantic central, state and local governments exist, with their decades-old legacy of labyrinthine procedures and bureaucratic controls, each of which needs to be tackled carefully and tenaciously. Creating the sound bite was easy, delivering is tough.
The World Bank’s ‘doing business’ report takes into account ten indicators of the ease of doing business in an economy, including starting a business, obtaining construction permits, getting electricity, registering property, enforcing contracts and paying taxes. Paying taxes is one of the worst indicators for India – this year the country’s rank dipped to a lowly 172 out of 190 countries, a big fall from previous reports where it ranked 157. To make a serious attempt at an improvement, we need to try to understand why this is particularly egregious. The reason for fall this year is because for the first time the World Bank report has also begun to look at the performance of tax administrations after a tax return is filed; that is, post-filing compliance. India fares particularly poorly since it takes long to obtain refunds, especially on the VAT/CENVAT, and because the processes of audits and appeals are cumbersome.
To be able to effect reforms that will impact India’s ranking, we need to understand the World Bank’s methodology. The report’s methodology has three sub-indicators: time to comply in hours, the number of payments and the total tax rate. On the sub-indicator for the total tax rate, India gets a score of 60.6, which is far worse than the OECD average of 40.9. This is being exacerbated not by the corporate income tax rate, which at 30% is moderate, but by other factors: first is the fact that you have two indirect taxes, the VAT and the CENVAT being implemented; second is the employees’ provident fund (EPF) and employees’ insurance; third is that India has a number of cesses. Now, with the GST being rolled out next year, we can hope to have a reduction in the indirect taxes, especially if a standard rate of 18% is agreed to. If the labour taxes remain at their current levels, and so do the cesses, there is not much of a chance of an improvement on this front.
As for the ‘number of payments’ sub-indicator, in India, owing to the significant spread of electronic filing both at the central and state tax administration levels, the number of payments for corporate income tax and VAT is in line with the best international practices; this is because if e-filing is prevalent, the ‘Doing Business’ report takes even multiple payments as one. However, the number of payments on the labour taxes, that is, the EPF is 12, one for each month, and on employees’ insurance is four. Now, if these are completely made online, the total number of payments will also be counted as one, marking a huge improvement; the number of payments will go down to just 10, lower than the OECD average.
Another area where India fares poorly is in the number of hours taken for compliance. This is also counted for the three major taxes, based on common international tax structures – corporate income tax, VAT and social security contributions. It takes just 45 hours to comply with the corporate income tax, which is in line with international good practice. The time to comply with VAT, CENVAT and central sales tax is taken together at 105 hours, which is high. In respect of the labour taxes – EPF and employees’ insurance – the time to comply is also a high 91 hours in a year, more than double the time it takes for corporate income tax compliance. The total time to comply comes to 241 hours, far higher than the OECD average of 163 hours. It is hoped that with the GST implementation the number of hours taken to comply with the GST would come down. Overall, there needs to be a concerted strategy to fix the compliance time on GST and labour taxes to bring down the total hours needed to comply. If the number of payments and the compliance time could be reduced in the EPFO, the ‘paying taxes’ indicator can improve. To achieve this, the finance ministry needs help from the labour ministry.
A rough calculation shows that if India brings down the total number of payments to 10 (very doable) and the total hours to comply to 160 (harder to achieve but possible), even with no change in the total tax rate, the ‘paying taxes’ rank could jump by over a hundred positions to the 60s. What is needed is a clear understanding of the specific reforms needed and a roadmap to implementing them. Sound bites are nice, but delivering on promises is far better.
Rajul Awasthi leads the tax policy and revenue administration work stream for the Europe and Central Asia region of the World Bank. Views expressed here are personal