Why tax collection is seemingly becoming progressive in nature in India through increase in share of direct tax collection despite no change in class nature of the state?

It can be explained by taking into account the fact that India at presently is in transformation phase by shifting from state led capitalism of Nehruvian era  to market led capitalism, unleashed  by the adoption of liberalization policies in early 1990's. The confidence gained by Indian bourgeois class in 1950 to 1980s phase through the process of capital accumulation to face world market and the global changes taking place at that time explain the shift from state to market led capitalism. This change required structural change to integrate with the world economy. During the 1950-90 phase Indian bourgeois class was at nascent in terms of capital accumulation thus it wants the state to led industrialization in 'basic industries' which require large investments. It concentrated mainly on producing consumer-ables and intermediate goods to supply to 'core industries' developed by state through contracts and license system. To safeguard the nascent industries in these sectors it wanted state to provide it 'tariff shield' in form of high import duties to protect its market, which explains large share of import duty (an indirect tax) in total tax collection  in phase of state led capitalism.

Taxes on income tax and corporates seemingly high in this era were easily avoided by Indian bourgeois because of its influence in the state apparatus through patronage and plain corruption. Thats why direct taxes like income tax and corporate tax always remain at lower levels in the phase of state led capitalism. The capital accumulation and consequent technological up gradation during the state led capitalism brought the required confidence in bourgeois class to compete at the global level and benefit in the process which resulted in Indian state adopting the market based capitalism.

For integration with global economy according to the WTO requirements the import duty was brought down which explains more than Rs1, 74,000 Cr of tax exemption on this front in 2010-11(about 20 percent of total tax collection). To attract foreign investment in India it was required that corporate tax in India should be lowered as per global requirements which resulted in Laffer curve effect being witnessed in India resulting in increased tax compliance to some extent. The rate was lowered to such an extent that the present effective corporate tax rate of 24 percent in India is among the lowest in the world. Corporate tax collection in India thus jumped to reach the level of Rs 3, 00,000 Cr in 2010-11.

 As the social support base for reforms was largely drawn from upper middle and middle classes of Indian society it was also allured in form of lower income tax rates. Since the tax assesses-es in India are still around only 3-4 crore, a meagre percentage of total population as well as working class masses, which makes it clear that the benefit of liberalization in form of high economic growth was predictably restricted to privileged few in form of high paying jobs. But the lower income tax rate did succeeded in increasing tax compliance among individual tax payers, which resulted in its share even crossing that of excise duty and import duty, to reach a level of around Rs 1,50,000 Cr in 2010-11. Excise duty was also lowered to boost market and curtail inflationary pressure in economy to an acceptable level which is generally witnessed in credit fuelled growth as is taking place in India currently.

Service tax though was brought to tax emerging sector in order to maintain sufficient revenue to fund government operations. It should be noted that tax to GDP ratio in India never crossed 15 percent and largely remained stagnant despite all these structural changes taking place. To ensure larger share of market in economy and to institutionalize role back of state in the meantime acts like FRBM was brought to put cap on government expenditure and consequently limiting taxation in future. Thus share of progressive taxes like corporate and individual income tax did increase to account for around 60 percent of union tax collection in last two decades but it largely occurred due to internal dynamics of capitalism resulting in qualitative shift to market model in India.    

By Saurabh Naruka