Tax to GDP Ratio

The tax to GDP ratio is the ratio of tax collected compared to national gross domestic product
(GDP). It gives policymakers and analysts a parameter that can be used to compare tax receipts
from year to year. As of 2021 Gross tax to GDP in India is around 10.2% in 2021. A greater tax
to GDP ratio indicates that the government can cast a wider fiscal net. It helps a government
become less reliant on borrowing. In this article, we will discuss the tax to GDP ratio which is
important for the UPSC examination.

What is Tax to GDP ratio?

● It is used as a measure to determine how well the government controls a country's

economic resources.
● The tax to GDP ratio measures the size of a country's tax revenue compared to its GDP.
● The higher the tax to GDP ratio, the better the country's financial position. The ratio
denotes the government's ability to fund its expenditures.
● A greater tax to GDP ratio indicates that the government can cast a wider fiscal net. It
helps a government become less reliant on borrowing.

Tax to GDP of India

● India consists of one direct taxpayer for every 16 voters present. Income tax is paid by
only 1% of India’s population.
● India’s Gross tax to GDP which was 11% in FY19, fell to 9.9% in FY20 and marginally
improved to 10.2% in FY21 (partly due to decline in GDP) and is envisaged to be 10.8%
in FY22, this is much lower than the emerging market economy average of 21 percent
and OECD average of 34 percent. According to latest Statements of Fiscal Policy
presented as component of Union Budget 2023-24 documents, Tax-GDP ratio has
improved from 10.7 per cent in BE 2022-23 to 11.1 per cent in RE 2022-23 and BE
2023-24. It is pertinent to note that 11% was attained in 2018-19.
Reasons for Low Tax to GDP Ratio in India

● There is the presence of a large informal/unorganized sector in India which makes it

vulnerable, causing greater tax evasion.
● There is greater dominance of the agriculture sector, for instance out of 25 crore
households in India, 15 crores belong to the agricultural sector which is exempted from
paying taxes.
● There is a high number of disputes between tax authorities and taxpayers, with one of
the lowest proportions of recovery of tax arrears.
● The direct to indirect tax ratio in India is around 35:65, which is lower than most of
the OECD economies where the ratio is 67:33 in favor of direct taxes.
● There has been a number of generous government policies which benefited the richer
private sector by providing various tax exemptions.
● Another factor that contributes to the low tax to GDP ratio is low per capita income and
high poverty.

Implications
Implications of low tax to GDP Ratio

● Due to a decrease in tax revenues, the Indian State becomes incapable of spending on

national security, welfare system, public goods, etc.
● There is heavy borrowing due to the low tax revenue of the government, this causes a
persistent deficit bias in fiscal policy.
● Such a system creates political incentives for the government to borrow money to buy
votes rather than work on building an effective tax system that will lead to economic
growth and development.
● Widespread tax evasion goes unchecked which hampers growth and most of the tax
burden falls on the high-productivity sectors that need growth.
● Lower tax collections decrease the capacity of the government to incur expenditure for
welfare schemes.
● There is increased dependence on indirect taxes which are regressive in nature.
● There is an increase in social inequality due to the asymmetric distribution of economic
resources in society.

Various Measures
Various Measures To Increase The tax to GDP Ratio

● The individualtaxpayer base should be widened to increase revenue collection.

● Merging of CBDT and CBEC based on the recommendations of the Tax Administration
Reform Commission (TARC).
● Exemptions provided under various provisions such as transfer pricing, base erosion
and profit shifting (BEPS), etc should be re-assessed.
● Providing effective dispute settlement mechanisms.
● Citizens' attitudes must be changed by instilling a feeling of national responsibility.
Conclusion

It is essential that in order to increase the tax to GDP ratio there should be progressive income
taxes, complemented by indirect taxation, property taxes, and capital taxes, etc. It is essential that
India’s informal sector is brought into the formal fold. Therefore focus should be on widening
the tax base rather than simply deepening it.

Features of good taxation system

 Good tax system should meet five basic conditions: fairness, adequacy, simplicity,
transparency, and administrative ease.
1. Fairness, or equity, means that everybody should pay a fair share of taxes. 
2. Adequacy means that taxes must provide enough revenue to meet the basic needs of society. A
tax system meets the test of adequacy if it provides enough revenue to meet the demand for
public services, if revenue growth each year is enough to fund the growth in the cost of services,
and if there is enough economic activity of the type being taxed so rates can be kept relatively
low.
3. Simplicity means that taxpayers can avoid a maze of taxes, forms, and filing requirements.  A
simpler tax system helps taxpayers better understand the system and reduces the costs of
compliance.
4. Transparency means that taxpayers and leaders can easily find information about the tax
system and how tax money is used.  With a transparent tax system, we know who is being taxed,
how much they are paying, and what is being done with the money. We also can find out who (in
broad terms) pays the tax and who benefits from tax exemptions, deductions, and credits.
5. Administrative ease means that the tax system is not too complicated or costly for either
taxpayers or tax collectors. Rules are well known and fairly simple; forms are not too
complicated; the state can tell if taxes are paid on time and correctly, and the state can conduct
audits in a fair and efficient manner. The cost of collecting a tax should be very small in relation
to the amount collected.

Characteristics of Good Tax System

To judge the merits of a tax system, it must be looked at as a whole. A good tax system is one
which has predominantly good taxes and which fulfills most of the canons of taxation: it must
yield sufficient revenue, but cause minimum aggregate sacrifice to the people and minimum
obstruction to incentives for production. The following are the characteristics of sound tax
system of any state:

1. Maximum Social Benefit: According to Dr. Dalton, that system of taxation is the best which
is based on the principle of maximum social advantage. To achieve this, the taxes should be on
different sections of people in such a way that the marginal sacrifice of different taxes should be
the same. Every tax system should promote the greatest good of the greatest number.

2. Equality in the distribution of tax burden: There are two aspects to the problem of the tax
system equality. The first is the proper treatment of persons in like circumstances. The rate in
this case is ‘equal treatment of equals’. All those persons who are placed in similar
circumstances should bear the same burden of taxation. The second aspect of equality in taxation
is the desirable relative treatment of persons in unlike circumstances. That is, those who are
better off should pay more taxes and they should bear a great burden of taxation.

3. Multi-taxation system or diversity system: A multiple tax refers to the tax system in which
taxes are levied on various items. The tax system should be diversified instead of being
concentrated in one or two taxes. At the same time, care should be taken to avoid multiplicity of
taxes

. 4. Productivity of the tax system: The term ‘productivity’ is interpreted in two senses. First,
the taxation system should be such as to provide adequate income to the government to meet its
expenditure. As the needs of the public authorities increase continually of the tax system should
yield increased revenues.

5. Rights of tax-payers: A sound tax system will have to safeguard the interests of the tax
payers. In a democratic set-up, the rights of the tax payers have to be continuously kept in mind.
Besides, the present level of taxation as well as the further prospects of taxation necessitate that
the interest and rights of taxpayers should be given adequate recognition.

6. Universal application of taxes: Each individual should pay according to his ability to pay,
and the individual possessing the same ability to pay should contribute the same amount by way
of taxes without any discrimination. In India, income tax is lacking these characteristics because
income from agriculture is not taxed to the extent the incomes have been taxed in the non-
agriculture sector.

7. Elasticity: The taxation system should provide to the government increased income with the
increase in the national income of the country. The taxation system should also yield more
income when the government expenditure goes up. Two things are essential to bring about
elasticity in the tax system. First there should be proper blending of direct and indirect taxes.
Secondly, certain sources of income should be exclusively reserved for emergencies.

8. Convenience: The government should keep in view the convenience of the tax-payer while
devising the taxation system of the country. Since the tax-payers make sacrifices when they pay
the taxes, it is essential for the government to see that they are not put to any avoidable
inconvenience