Introduction

The tax-to-GDP ratio is a critical economic indicator that shows the proportion of a nation's tax revenue compared to its Gross Domestic Product (GDP). A higher ratio suggests a country's improved financial health, reflecting the government's capability to fund its expenditures without excessive borrowing.

Importance

An aspiring tax-to-GDP ratio signifies tax buoyancy, where revenue follows GDP growth. This measure reflects a government's fiscal wellness and its potential to support socio-economic programs, military, wages, and pensions.

In the case of India, despite encountering high growth rates, it has faced challenges in expanding its tax base. A low tax-to-GDP ratio constrains investment in infrastructure and challenges fiscal deficit management. Although India has shown improvement over the last six years, its ratio still trails behind the OECD average of 34% and remains lower than some peer developing nations. Developed countries usually boast higher ratios.

How to Improve

During the 2018-19 fiscal year, India's tax-to-GDP ratio dipped to 10.90%, missing an anticipated 16%. To bolster this ratio, enhancing tax compliance is vital. The introduction of the Direct Tax Code (DTC) could strengthen compliance. Similarly, streamlining the GST and implementing a simplified two-rate system can curb evasion. Moreover, while expanding the tax base and boosting compliance are crucial for raising tax income, promoting economic growth is equally essential.