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What is tax-to-GDP ratio & where does India fare on this indicator?

A low tax-to-GDP ratio poses significant challenges for the government to spend money on creating necessary infrastructure in the economy and raise investment.

ET Online|
Last Updated: Jan 13, 2020, 11.03 AM IST
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Slowing economic growth in the current fiscal has raised questions on meeting the tax collection target. This could further hurt India's tax-to-GDP ratio.
India's gross tax-to-gdp ratio fell to 10.9 per cent in 2018-19 on account of lower than estimated GST collection. For years, India has struggled to increase its tax-to-gdp ratio, a marker of how well the government controls a country's economic resources.

A low tax-to-GDP ratio poses significant challenges for the government to spend money on creating necessary infrastructure in the economy and raise investment.

Slowing economic growth in the current fiscal has raised questions on meeting the tax collection target. This could further hurt India's tax-to-GDP ratio.

Let's take a look at what exactly tax-to-GDP ratio means.
  1. What is tax-to-GDP ratio?
    Tax-to-GDP ratio represents the size of a country's tax kitty relative to its GDP. It is a representation of the size of the government's tax revenue expressed as a percentage of the GDP. Higher the tax to GDP ratio the better financial position the country will be in. The ratio represents that the government is able to finance its expenditure. A higher tax to GDP ratio means that the government is able to cast its fiscal net wide. It reduces a government's dependence on borrowings.
  2. Why is it important?
    A higher tax to GDP ratio means that an economy's tax buoyancy is strong as the share of tax revenue rises in sync with the rise in the country's GDP. India, despite seeing higher growth rates, has struggled to widen the tax base. Lower tax-to-GDP ratio constrains the government to spend on infrastructure and puts pressure on the government to meet its fiscal deficit targets.
  3. Where does India stand among global peers?
    Although India has improved its tax-to-GDP ratio in the last six years, it is still far lower than the average OECD ratio which is 34 per cent. India's tax-to-GDP ratio is lower than some of its peers in the developing world. Developed countries tend to have higher tax-to-GDP ratio.
  4. How can it be improved?
    The most important measure for improving tax to GDP ratio is ensuring the citizens pay their taxes. The introduction of Direct Tax Code can help in greater compliance in this regard. Rationalisation of GST and moving towards a two-rate structure can also help in increasing compliance and putting an end to tax evasion. While measures to improve tax compliance and widen the tax base will yield higher tax revenue, the importance of higher economic growth cannot be ignored. The onus to bring back the Indian economy back on a higher-growth trajectory will be on the upcoming Budget.

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