Highlight the significance and implications of a low Tax-to-GDP Ratio on the Indian social contract.


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.


 

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