Tax-GDP ratio at 10-year low

Posted on 9th Jun 2020 by rohit kumar

India's tax-to-GDP ratio fell once again to a decade-low of 9.88 percent in Covid's first year. The main reason for this decline is the decrease in customs and corporation tax collection, while excise duty has increased marginally.

 

The tax and GDP ratio was 10.97 percent in the previous year and 11.22 percent in 2017-18. There is likely to be a huge fall in revenue in the first quarter of the current financial year as economic activity has come to a standstill due to the ban caused by coronavirus.

 

This ratio shows that the government is capable of financing its expenditure and is also a sign of tax compliance in the country. Developed countries have higher GDP to tax ratios.

 

Gross tax revenue has dropped 3.39 percent in 2019-20 and collections have decreased by Rs 1.5 lakh crore as compared to the revised budget target of FY.

 

A 20.5 percent increase in gross tax revenue is needed to achieve the budget target of the year in 2020-21. GDP growth has reached an 11-year low of 4.2 percent in 2019-20.

 

Higher tax and GDP ratio suggests that the tax base is increasing as GDP increases. The government has taken some steps to improve compliance, including the implementation of the Goods and Services Tax and other decisions with electronic assessments by the tax authorities.

 

The low GDP to GDP ratio hinges on the government's capital expenditure and this increases the pressure of fiscal deficit.

 

In 2019-20, the corporation tax has fallen by 16 percent, customs duty by 7 percent, while excise duty has increased by 3 percent. India is far behind OECD countries in terms of tax-GDP ratio, which averages 34 percent.

 

In fact, the share of tax revenue in the revenue receipts of the Center has come down to 81.3 percent in 2019-20, from 85.8 percent in its first year and 84.3 percent in 2017-18.

 

The ratio of direct tax and GDP has fallen to a 14-year low of 5.1 percent, while the indirect tax and GDP ratio has fallen to a 5-year low in 2019-20.

 

The share of corporation tax in the gross tax has come down to 27.7 percent, a 10-year low.

 

The share of customs duty in gross tax has come down to 5.43 per cent in FY20, from 5.66 per cent in its first year.

 

Aditi Nair, chief economist at Icra, said the combined impact of corporate tax cuts and the economic slowdown has affected overall collections, while higher gold prices and falling demand have led to lower customs duty arrivals. Nair said, "We estimate that in FY21, central taxes will fall by 30 per cent compared to the budget estimate."

 

The Central Board of Direct Taxes made it clear on Sunday that the growth of gross direct tax collection was actually 8 per cent in 2019-20 at Rs 14,01,920 crore, but the direct tax revenue due to the tax reform of last year of Rs 1,68,200 crore. Has decreased by 5 percent. The government had said last year that it would reduce the corporation tax rate to 25 percent to encourage private sector investment.

Other news