ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Raising the Tax-to-GDP Ratio

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The tax-to-GDP (gross domestic product) ratio of a nation represents the overall tax revenues as a percentage of the GDP and is an important indicator of socio-economic development and financing of government expenditure. India’s overall tax-to-GDP ratio (centre and states combined) has been abysmally low and stood at 17.32% as compared to the Organisation for Economic Cooperation and Development (OECD) countries’ average of 34% for 2018. It means that the government receives 17.32% of the GDP in the form of tax receipts from the public and companies. Only 4.5% of India’s population of 135 crore are income taxpayers.

Although the GDP grew three times from ₹ 49,87,090 crore in 2007–08 to ₹ 1,50,65,010 crore in 2016–17, the overall tax-to-GDP ratio (all India) increased marginally from 17.45% to 17.82% and the direct tax-to-GDP ratio (all India) actually declined from 6.39% to 5.72% during this period. India’s lower tax-to-GDP ratio is on account of a lower direct tax base and a large unorganised sector. While the real GDP grew at an average of 6.78% during the last 10 years from 2007–08 till 2016–17, the direct tax-to-GDP ratio growth averaged 5.81% during the same period. The deficit between the GDP growth rate and direct tax-to-GDP growth rate widened to 2.47% in 2016–17. This aberration has to be corrected and the direct tax-to-GDP ratio needs to be increased earnestly by bringing more people into the tax net.

It is worthwhile to mention that the Kelkar Committee, in its 2002 report titled “Report of the Task force on Direct Taxes,” had recommended bringing the “missing middle” under the ambit of direct taxes. The missing middle comprise of those professionals and entities which are outside the purview of direct taxes. India’s entire agricultural sector comprising of 60% of the overall labour force is outside the ambit of direct taxes.

It is high time to bridge this inequity of cheap input and non-taxable output income. Broadening the tax base by capturing the missing middle along with agricultural income beyond a large threshold value into the tax net could help the central government to lower its fiscal deficit and provide more room to spend on developmental activities.

Sudip Das

Bengaluru

Updated On : 12th Jul, 2019

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