Tax -to-GDP ratio is the ratio of total taxes (both direct and indirect) collected to the Gross Domestic Product in a given financial period (typically one-year). Recent economic survey stated that India’s 16.6% tax to GDP ratio necessities the government to take immediate steps to mop up revenue sources.
Significance of low tax-to-GDP ratio:
- It signifies the high poverty rate (21%) prevalent in India.
- It points to the fact how the rich who can get the aid of tax consultants are using loopholes in income tax laws.
- It is indicator of poor government services like hospitals, schools, which forces people to use PRIVATE services.
Implications:
- It lowers the GDP: One of the reasons for lower tax to GDP is due to pervasive structure of exemptions which indirectly impacts the GDP growth.
- Lower revenue means lower spending on social sectors as health and education.
- Disturbs social contract: Reduced revenue would in a way further inequality as it effects the welfare measures provided by the state.
- Affects government policy:It creates political incentives for successive governments to borrow money to buy votes rather than build an effective tax system that will spur economic growth.
- High deficit:It also increases government borrowing and thus difficult to manage fiscal deficits. It also effects government spending on national security.
- Burden on few sectors: Some economists argue that as high productive sectors are taxed it is incentivizing the low productivity sectors not to come into formal tax system.
- Parallel economy: Low taxation means most of the money in economy goes unaccounted and hence will encourage parallel economy.
- Vicious cycle: Low tax means less revenue resources with the state meaning less public investment and lower job opportunities, thus lower economic progress.
Thus the appalling tax-to-GDP ratio has to be increased so as to eliminate vices of poverty, hunger and also help government keep fiscal deficit under control.
