Low Tax to GDP Ratio in India

Low Tax to GDP Ratio in India

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The tax-to-GDP ratio is a fundamental economic indicator that measures the proportion of total taxes collected by a country relative to its Gross Domestic Product (GDP). It provides crucial insights into a nation's fiscal health and its capacity to mobilize revenue for public services, infrastructure development, and welfare programs. The tax-to-GDP ratio formula can be represented as follows. Tax-to-GDP Ratio = (Total Tax Revenue / Gross Domestic Product) x 100. Total Tax Revenue refers to all taxes collected by the government, including direct taxes (income tax, corporate tax) and indirect taxes (VAT, GST, excise duty). The Gross Domestic Product (GDP) represents the total value of all goods and services produced within a country's borders during a specific period.

The tax-to-GDP ratio world average was around 15% to 17%. This means that, on average, countries collect 15% to 17% of their GDP as tax revenue. However, it's essential to note that the tax-to-GDP ratio varies significantly across countries, influenced by economic policies, tax structures, and levels of tax compliance. A significant portion of India's economy operates in the informal sector, where transactions are often undocumented and untaxed. This informal nature of economic activities limits the government's ability to collect taxes effectively.

The tax-GDP ratio of India has historically been relatively low compared to other major economies. As of the last available data, India's tax-to-GDP ratio hovered around 17% to 18%, slightly above the world average. While there have been efforts to improve this ratio, it still falls short of the government's desired level.

There are several reasons for the low tax-to-GDP ratio in India and they include the dominance of indirect taxes, tax evasion and avoidance, and complex tax structure. India's tax revenue is heavily reliant on indirect taxes, such as the Goods and Services Tax (GST), excise duty, and customs duty. These taxes tend to be regressive, impacting lower-income groups disproportionately and discouraging tax compliance. Tax evasion and avoidance are persistent challenges in India. Some individuals and businesses resort to various means to evade taxes, including underreporting income, using loopholes, and engaging in aggressive tax planning. India's tax system has historically been complex and burdensome, deterring compliance and leading to potential loopholes. The introduction of the Goods and Services Tax (GST) aimed to simplify the tax structure, but challenges in implementation persisted during the initial phase.