India's Tax Tightrope: Balancing Revenue and Growth

2 Jan 2024 , 02:59 AM

India’s GDP (gross domestic product) has increased significantly over the past few years, but the country’s gross tax-to-GDP ratio has continued to expand slowly. For example, the tax-to-GDP ratio decreased from 11% in FY19 to 9.9% in FY20. Owing to the general economic downturn brought on by COVID-19, the percentage marginally improved to 10.2% in FY21. In addition to the economic upheavals, India has long struggled to raise the tax-to-GDP ratio—basically the government coffers—which has a lasting effect on the economy.

Because the ratio of taxes to GDP has a significant effect on the nation’s overall economic situation. It becomes crucial to be aware of it during the budgetary season. which professionals currently observe on a broad basis.

The percentage of the nation’s GDP that is used by the government to fund taxes is known as the tax-to-GDP ratio. For instance, the tax-to-GDP ratio for FY19 was 19%, meaning that taxes from the general public and corporate organisations contributed 19% of the GDP to the government.

An economy that is robust and experiences growth in both tax revenue and GDP as a whole is indicated by a greater tax-to-GDP ratio. The treasury of the government is well-represented by this ratio. The tax-to-GDP ratio determines the government’s ability to pay for a range of programmes, such as military spending, socioeconomic development, salaries, and pensions.

A higher ratio highlights the nation’s better financial standing and the ability of the government to pay for its outlays. Strong tax-to-GDP ratios enable the government to spread out its fiscal resources, which lowers the requirement for high levels of borrowing.

The tax-to-GDP ratio must be adequate to fund all of the government’s needs in order for it to generate enough revenue to pay for its outlays. This ratio is larger among wealthy western nations; on average, it represents 34% of GDP. Thus they can set aside money for things like free education, hospital bills, and other needs.

India has a tax-to-GDP ratio that is lower than that of many other nations. India’s inability to broaden its tax base has limited government infrastructure expenditure and increased pressure to fulfil fiscal deficit targets. Even with the improvements, it still lags significantly behind the developed world average.

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