Tax to GDP Ratio

Tax to GDP Ratio in India:

1. Tax Buoyancy and Historical Trends:
• The tax to GDP ratio is influenced by economic growth, personal incomes, corporate profits, and consumption.
• Tax buoyancy occurs when tax collections rise along with economic growth.
• India's gross tax collections reached the highest level of 11.6% in 2017-2018.
2. Decline in Tax to GDP Ratio:
• The gross tax to GDP ratio declined to 10.9% in 2018 and further to less than 10% in FY20.
• Factors contributing to the decline include decreased collections from customs duties and corporation tax, while excise duty posted marginal growth.
• The economic slump, particularly in FY20, contributed to the decline in tax collections.
3. States' GST Collections Impact:
• India's tax to GDP ratio becomes 16.6% when adding taxes and duties collected by states and local bodies.
• Statistically, the gross tax collections of the Government of India have decreased since 2017-2018 due to states collecting their own GST.
4. Comparison with Other Countries:
• Tax to GDP ratios vary globally. In the EU-28 in 2015, tax revenue stood at 40.0% of GDP.
• BRICS countries have different tax to GDP ratios: Brazil (35.6%), South Africa (28.8%), Russia (23%), and China (19.4%).
• Developed countries like Sweden, France, Denmark have higher tax to GDP ratios, reflecting their higher per capita income and the ability to pay higher taxes.
5. International Comparisons:
• USA has a tax to GDP ratio of 25.4%.
• France has a high tax to GDP ratio of 45%, while Denmark's is even higher at 48.6%.

Note: The tax to GDP ratio is a crucial economic indicator, reflecting the fiscal health of a country and its ability to generate revenue for public expenditure. Economic factors, policy changes, and global events can influence this ratio over time.

Factors Contributing to India's Relatively Low Tax to GDP Ratio:

1. Developing Country Status:
• India is a developing country with lower per capita income, influencing the ability to collect higher taxes.
2. Large Informal Sector:
• The presence of a substantial informal sector, where economic activities go unreported, contributes to lower tax collections.
3. Exemption of Agricultural Income:
• Agricultural income is exempt from taxation, impacting the overall tax revenue.
4. Tax Exemptions and Expenditures:
• Numerous tax exemptions and expenditures reduce the effective tax base, limiting revenue generation.
5. Parallel Economy:
• The existence of a parallel or shadow economy, involving unreported transactions, affects the accuracy of tax assessments and collections.
6. Capacity Constraints in Tax Machinery:
• The tax administration may face capacity constraints, impacting its ability to effectively assess and collect taxes.

Impact of Economic Reforms on Tax to GDP Ratio:

1. Formalization of the Economy:
• Since 2016-2017, the formalization of the economy has gained momentum, driven by measures like demonetization and the implementation of GST.
2. Digital Payments and Increased Tax Filings:
• Demonetization and emphasis on digital payments have resulted in more people filing tax returns.
3. GST and Higher Compliance:
• GST has increased compliance due to features like input tax set off, making it harder for entities to evade taxes.
4. Operation Clean Money:
• Initiatives like Operation Clean Money were launched to curb unaccounted money funneled into bank accounts post-demonetization.

Recent Trends in Tax to GDP Ratio:

1. Impact of Rationalized Tax Rates:
• Rationalization of tax rates has contributed to a rising tax-GDP ratio.
2. Factors Leading to Increased Ratio (Except Pandemic Year):
• More economic activity (GDP growth).
• Broadening of the tax base with more taxable economic actions.
• Better enforcement and compliance.

Note: The tax to GDP ratio is a dynamic indicator influenced by economic, regulatory, and enforcement factors. Recent reforms and initiatives have aimed at improving compliance, broadening the tax base, and enhancing overall revenue generation.