Tax to GDP ratio measures how much tax is collected in relation to the country’s GDP.
It gives policymakers and analysts a parameter that can be used to compare tax receipts from year to year.
The better the country’s financial situation, the higher the tax to GDP ratio. The ratio indicates how well the government can afford its expenses.
Only ~ 6% of people in India pay income tax, i.e. 8 crore people out of 132 crore population. As of 2023 Gross tax to GDP in India is 11.1%.
Causes of Low Tax to GDP Ratio in India:
- There is the presence of a large informal/unorganized sector in India which makes it vulnerable, causing greater tax evasion.
- There is greater dominance of the agriculture sector, for instance out of 25 crore households in India, 15 crores belong to the agricultural sector which is exempted from paying taxes.
- Constant disputes between tax authorities and taxpayers, with meagre recovery of tax arrears.
- The direct to indirect tax ratio in India is around 55:45 (Budget Estimates 2023-24) , whereas on an average the OECD economies have the ratio of 50:50
- There have been several generous government policies which benefited the richer private sector by providing various tax exemptions.
- Another factor that contributes to the low tax to GDP ratio is low per capita income and high poverty.
Consequences of Low Tax to GDP Ratio :
- Due to a decrease in tax revenues, the Indian State becomes incapable of spending on national security, welfare system, public goods, etc.
- There is heavy borrowing due to the low tax revenue of the government, this causes a persistent deficit bias in fiscal policy.
- Such a system creates political incentives for the government to borrow money to buy votes rather than work on building an effective tax system that will lead to economic growth and development.
- Widespread tax evasion goes unchecked which hampers growth and most of the tax burden falls on the high-productivity sectors that need growth.
- Lower tax collections decrease the capacity of the government to incur expenditure for welfare schemes.
- There is increased dependence on indirect taxes which are regressive in nature.
- There is an increase in social inequality due to the asymmetric distribution of economic resources in society.
Measures to be taken:
- The individual taxpayer base should be widened to increase revenue collection.
- Exemptions provided under various provisions such as transfer pricing, base erosion and profit shifting (BEPS), etc. should be re-assessed.
- Providing effective dispute settlement mechanisms.
- Implementing proposed direct and indirect tax reforms.
- Citizens’ attitudes must be changed by instilling a feeling of national responsibility.
It is essential that to increase the tax to GDP ratio India’s informal sector is brought into the formal fold and there should be progressive income taxes. This should be complemented by indirect taxation, property taxes, and capital taxes. Thus, focus should be on widening the tax base rather than simply deepening it.
