The tax- to-GDP ratio is used to determine how well a nation’s government directs its economic resources. Higher tax revenues means a country is able to spend more on improving infrastructure, health, and education- keys to the long-term prospects for a country’s economy and people.
To know about the TAX to GDP rise ratio of India, first we have to know about the relation between TAX and GDP. How they play an important role in the growth of our country.
So, in this article we give you the brief information about the TAX and GDP ratio, who it affects our economy, what is their importance, and most importantly its highest rise in the last 23 years.
A tax-to-GDP ratio is a measure of a country’s tax income in relation to its economy’s size as measured by GDP (GDP). Because it displays prospective taxes compared to the GDP, the ratio is a valuable tool for analyzing a country’s tax revenue. It also allows for worldwide comparisons of tax collections from other nations, as well as a picture of the general trajectory of a country’s tax policy. The tax GDP ratio depicts a country’s tax revenue in terms of GDP. For example, if India’s tax GDP ratio is 20%, it signifies that the government receives 20% of its GDP in tax revenue from individuals and businesses. The tax GDP ratio indicates the wealth of the government’s coffers. Tax GDP ratio determines the government’s capacity to spend on social-economic development programme, military, salaries, and pensions, among other things.
Reasons for the low tax-to-GDP ratio
- The wealthy private sector profited from a tax exemption raj.
- India has a relatively large informal/unorganised sector, and tax evasion is more rampant in the informal sector compared to organised sector.
- Tax revenues are low due to low per capita income and significant poverty.
- 15 crore of India’s 25 crore families are in the agricultural sector, which is tax free.
- There is an untaxed parallel economy of unaccounted incomes and expenditures.
- India has one of the greatest numbers of tax administration-taxpayer conflicts, with the lowest percentage of tax arrears recovered.
- The direct-to-indirect tax ratio in India is around 35:65. This is in stark contrast to the majority of OECD economies, where the ratio is 67:33.
What should the appropriate tax-to-GDP ratio
The government should be able to fund its expenditures with sufficient income. As a result, the tax-to-GDP ratio should be sufficient to cover government spending.
The tax-to-GDP ratio is greater in Western countries. At the same time, government spending is quite high, since the government spends on healthcare expenses, free schools, and other things.
In comparison to a number of other nations, India’s tax-to-GDP ratio is lower. According to the 2016-17 budget, the overall tax-to-GDP ratio for the centre and states is expected to be approximately 16.5 percent.
According to the 2016-17 budget, the tax GDP ratio for the centre was 11.3 percent, and the 2017-18 budget makes the same forecast of 11.3 percent.
Consequences of a Low Tax-to-GDP Ratio
As a result of lower tax income, the Indian government is unable to spend on national security, welfare, and public amenities, among other things.
Due to the government’s low tax collection, there is a lot of borrowing, which leads to a permanent deficit tilt in fiscal policy.
A system like this provides political incentives for the government to borrow money to purchase votes rather than work on creating a tax system that promotes economic growth and development.
Widespread tax evasion remains unpunished, stifling growth and putting the majority of the tax burden on the high-productivity industries that require it.
Measures to Increase Tax-to-GDP Ratio
To boost revenue collection, the individual taxpayer base should be expanded.
CBDT and CBEC will be merged in accordance with the Tax Administration Reform Commission’s recommendations (TARC).
Exemptions under other regulations, such as transfer pricing, base erosion and profit shifting (BEPS), and so on, should be re-evaluated.
Providing efficient means for resolving disputes.
The mindsets of citizens must be shifted through fostering a sense of national duty.
There is a need for an effective conflict resolution process.
Create a dedicated task force to track economic operations that are mostly conducted in cash, therefore bringing the parallel economy within the tax net. Keeping an eye on ornaments businesses to see whether anyone has acquired gold without paying taxes.
To enhance the tax-to-GDP ratio, progressive income taxes must be combined with indirect taxation, property taxes, and capital taxes, among other things. It is critical to integrate India’s informal sector into the official economy. As a result, rather than just deepening the tax base, the focus should be on broadening it.
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