India’s Tax-GDP Ratio: Current Figures and Trends

Tax-to-GDP Ratio is obtained by dividing the GDP by gross tax collection. It’s an indicator of government income and is shown as percentage of GDP. Higher tax-GDP ratio also denotes higher equitable distribution of national income.

India’s Tax-GDP Ratio

In 1950-51, India’s tax-GDP Ratio was around 6% only. It rose to around 10% in 2010-11. In last few years, the tax-GDP Ratio has increased substantially but still India is very far from being a full tax-paying democracy. It’s worth note that only 5.5% of earning people in India pay tax while only 15.5% of the Net National Income is reported to the tax authorities. Further, at present, India has 7 taxpayers for every 100 voters ranking us 13th amongst 18 of our democratic G-20 peers. Ideally, this number should be close to 23%. Due to under-tax compliance and narrow tax net, the tax-to-GDP ratio of the country stands at around 16-17%. This is much below the developed countries for example; the tax-GDP ratio in OECD countries is around 34%. We note here that the highest tax-GDP ratio in the world is of Denmark.

Reasons for Low Tax GDP Ratio

There are several reasons for low-tax-GDP ratio.

Firstly, as mentioned above, India has a low population of tax payers. Low per capita income, low average income and high poverty are key reasons for this.

Secondly, those who pay tax either pay less due to exemptions or under-report the income. One example is unorganized sector and MSMEs. MSMEs have strong profitability but government is generally not able to capture their earnings in tax revenues due to variety of exemptions, compliance issues etc.

Thirdly, service tax in India was imposed late and imposed only on few sectors. Its share has been traditionally low in gross tax revenues of the government. Currently, services comprise about 60% of the GDP, yet the service tax collected is 15% of the Gross Tax Revenue as shown by below graphics:

Fourthly, the tax collections are always sensitive to growth trends. The corporate taxes are hit by recession, decreasing domestic demand etc.

Ways to Increase Tax-GDP Ratio

There are several ways to increase tax-GDP ratio. These include raising the taxes, lowering the tax exemption slabs, imposition of new taxes or cesses or surcharges, boosting the demand etc. Out of these, the easiest method in the hand of the government is to hike taxes. The survey recommendations for increasing tax-GDP ratio are:

• Don’t go with a populist measure of raising tax exemptions limits
• Try to impose some new small taxes or cesses
• Stick on fiscal consolidation path while taking measure to sustain growth

Here, the Survey cautions that the democracies which have higher tax-GDP ratios have taken a lot of time to reach to those figures and it would be wiser to not to reach any harsh judgment of India’s performance because there is much difference between the evolution of Indian economy and economies of those countries.