{"id":199231,"date":"2022-08-08T18:00:38","date_gmt":"2022-08-08T12:30:38","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=199231"},"modified":"2022-08-08T18:01:35","modified_gmt":"2022-08-08T12:31:35","slug":"indias-tax-gdp-ratio-may-be-too-high","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/indias-tax-gdp-ratio-may-be-too-high\/","title":{"rendered":"India\u2019s tax-GDP ratio may be too high"},"content":{"rendered":"\n

Source<\/strong>: The post is based on an article \u201cIndia\u2019s tax-GDP ratio may be too high\u201d<\/strong> published in the Indian Express<\/strong> on 8th<\/sup> August 2022<\/strong>.<\/p>\n

Syllabus: <\/strong>GS 3 The Union Budgeting in India<\/p>\n

Relevance: <\/strong>Tax\/GDP Debate<\/p>\n

News:<\/strong> In a recent web publication, the IMF published its World Revenue Longitudinal Data set<\/strong> for all countries, from 1990-2019.<\/p>\n

Common Observations of India\u2019s Tax\/GDP Ratio<\/strong><\/h5>\n

(1) India\u2019s Tax\/GDP ratio is low, at around 10-11% of GDP. It has stayed close to that level for the last 20 years. In 2019, it hit a decade low of 10% of GDP, the same as in 2014.<\/p>\n

(2) In comparison with our peers, India\u2019s tax\/GDP ratio is much lower. Therefore, it is argued that it should be increased.<\/p>\n

Debates on Tax\/GDP Ratio in the Indian Economy<\/strong><\/h5>\n

India\u2019s tax\/GDP ratio is one of the three important fiscal variables in the economy, i.e., taxes, fiscal deficit,<\/strong> and debt<\/strong>. And it is lower than what it \u201cshould\u201d be.<\/p>\n

These fiscal variables are interrelated. Therefore, a lower tax\/GDP ratio impacts the other two fiscal variable<\/strong>s. I.e., lower tax revenue means higher fiscal deficit, for the same level of expenditures, and higher deficit means higher debt. All three, directly or indirectly, are assumed to affect growth and\/or inflation.<\/p>\n

It has been argued that the low tax ratio in India has led to a lower rate of investment, a higher fiscal deficit, and lower GDP growth.<\/p>\n

What are the issues in the arguments for low-tax\/GDP ratio in India?<\/strong><\/h5>\n

However, there is no empirical evidence <\/strong>to indicate a causal relationship<\/strong> between tax ratios or fiscal deficits <\/strong>and growth<\/strong>. But no doubt there is a well-established relationship<\/strong> between investment and growth.<\/p>\n

India should compare its tax-GDP ratio with the tax\/GDP ratio of the G20 countries<\/strong>. There is a misinterpretation<\/strong> because the tax collected is a function of the average level of per capita income. And Per capita income in the G20 varies from around $2,100 (India) to around $65,000 (US).<\/p>\n

In the pre-pandemic year 2019, India\u2019s tax-GDP ratio was 16.7%. It was higher than that of China (15.9%), Mexico (14.1%), Indonesia (11.0%), Saudi Arabia (5.9%), and Turkey (15.9%) among G20 economies.<\/p>\n

If the comparison is done with the tax-GDP ratio adjusted for PPP per capita income, the IMF\u2019s data reports that the world average tax gap <\/strong>is -1.3 percent and India is at +1.2 percent for the nine years 2011-2019. So, India\u2019s tax GDP ratio averages 2.5 percentage points more than an average economy.<\/p>\n

Among 70 Emerging economies, excluding Advanced Economies and countries belonging to the former Soviet Union, India\u2019s rank is 20, i.e., India\u2019s Tax ratio is higher than 50 peers on a systematic basis.<\/p>\n

Debates over the structural measures to increase the tax\/GDP ratio of India<\/strong><\/h5>\n

Hike Corporate Tax Rate View:<\/strong> Some experts argued to increase revenue from corporate tax <\/strong>(one of three major components of tax revenue, the other being income and indirect taxes). Because inequality was increasing, the rich should pay more taxes to lower the fiscal deficit.<\/p>\n

Lower Corporate Tax Rate View:<\/strong> A small minority of economic experts argued that the higher corporate tax rates will stifle investment, increase tax un-compliance<\/strong>, and lower growth<\/strong>. Therefore, there should be a lowering of the corporate tax rate in India to meet the intended goals<\/p>\n

Various Structural Change Measures Taken for Increasing the Tax Collection in India Post-2019<\/strong><\/p>\n

Corporate tax cut 2019:<\/strong> In September 2019, the Finance Minister<\/strong> lowered the corporate tax rate by around 10 percentage points. This was one of the largest corporate tax cuts<\/strong> in world history. Unfortunately, the pandemic struck the world a few months later and disrupted world economies.<\/p>\n

Efficacy of the tax cut in India<\/strong><\/h5>\n

The corporate tax revenue has increased by 66%, and GDP by 33% based on the use of fiscal 2019-20 <\/strong>as a base. It means, there has been an average tax buoyancy of 2.0 over three years since 2019.<\/p>\n

Tentatively, the tax-GDP ratio in the fiscal year 2022-23 will average over 18 percent in India, a level close to Japan and the US.<\/p>\n","protected":false},"excerpt":{"rendered":"

Source: The post is based on an article \u201cIndia\u2019s tax-GDP ratio may be too high\u201d published in the Indian Express on 8th August 2022. Syllabus: GS 3 The Union Budgeting in India Relevance: Tax\/GDP Debate News: In a recent web publication, the IMF published its World Revenue Longitudinal Data set for all countries, from 1990-2019.… Continue reading India\u2019s tax-GDP ratio may be too high<\/span><\/a><\/p>\n","protected":false},"author":10343,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[216,10500],"class_list":["post-199231","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-gs-paper-3","tag-indian-express","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/199231","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10343"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=199231"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/199231\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=199231"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=199231"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=199231"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}