Context: A recent assessment estimates India’s overall tax-to-GDP ratio at 19.6% in FY2024, covering both Centre and States. This marks steady improvement in domestic resource mobilisation, reflecting expanding formalisation, improved compliance, and stronger direct tax collections.
Key Trends
- Central Gross Tax Revenue: ~11.2% of GDP in FY24; projected 11.7% in FY25.
- Direct Taxes: Ratio reached a 15-year high of 6.64% in FY24; likely to rise to 6.7% in FY25.
- Tax Buoyancy: Long-term buoyancy at 1.1, meaning tax revenues grow slightly faster than nominal GDP.
- Global Position: India’s ratio is above many emerging economies (e.g., Malaysia, Indonesia) but below the OECD average (~34%).
Understanding the Tax-to-GDP Ratio
- Definition: Share of total tax revenue in a country’s nominal GDP.
- Formula: Total Annual Tax Revenue ÷ Nominal GDP.
- Fiscal Capacity Indicator: Shows the state’s ability to mobilise domestic resources.
- Economic Signal: Higher ratios imply a broader tax base and formal economy.
- Global Benchmark: The World Bank suggests 15% as a tipping point for sustainable development.
Positive Implications
- Fiscal Stability: Reduces dependence on borrowing; supports fiscal consolidation.
- Public Investment: Enables higher capital expenditure on infrastructure and welfare.
- Redistributive Role: Rising direct taxes strengthen progressive redistribution.
Potential Risks
- Consumption Drag: Excessive taxation may reduce disposable incomes.
- Inflationary Effects: High indirect taxes (GST, excise) can raise prices.
- Investment Concerns: Over-taxation could deter investment or trigger capital relocation.
Tax Buoyancy Explained
- Meaning: Responsiveness of tax revenue growth to changes in nominal GDP.
- Formula: % Change in Tax Revenue ÷ % Change in Nominal GDP.
- Buoyancy > 1: Revenue grows faster than the economy due to better compliance or base expansion.
- Buoyancy < 1: Collections lag, indicating evasion, exemptions, or informality.
- Sustained buoyancy above 1 gradually raises the tax-to-GDP ratio.