Tax GDP ratio shows the tax revenue for a country measured in terms of GDP. For example, if India’s tax GDP ratio is 16%, it means that the government gets 16% of its GDP as tax contribution from the public and entities. Here, tax GDP ratio shows the richness of the government’s exchequer. The government’s ability to spend on socio-economic development programs, military, salary, pension heads etc., depends on tax GDP ratio.
What should be the ideal tax -GDP ratio?
The government should get adequate revenues to finance its expenditure. Hence tax GDP ratio should be enough to meet government expenditure.
In Western countries, the tax GDP ratio is higher. At the same time, government expenditure there is also very high as those Government makes expenditure on hospital expenditure, free schooling etc.
In India, compared to several other countries, tax-GDP ratio is lower. The combined tax-GDP ratio for the center and states is estimated to be around 16.5% as per 2016-17 budget.
For the center, the tax GDP ratio was 11.3% as per 2016-17 budget and the 2017-18 budget also makes the same estimate.
Reasons for low tax-GDP ratio:
Tax GDP ratio is lower because of narrow tax base. Only 3% of the country’s population pay income tax. There is large scale tax evasion. Similarly, corporate have tendency to avoid taxes.
Weaknesses in tax administration is another factor.
What are the measures for the improvement of tax-GDP ratio in India?
Over the last one decade the government has made several steps to raise tax -GDP ratio. The main hurdle is the prevalence of black economy. The demonetization programme and the follow up steps have added strength to the fight against black money. Tax -GDP enhancement steps are broadly two:
1. Refining tax structure
2. Improving tax administration
Refining tax structure
A simplified tax structure with optimum number of tax rates, optimum tax rates, low concessions and deductions etc., makes low scope for tax avoidance as well as tax evasion. Government efforts towards this direction are:
The corporate income tax rate is targeted to brought down to 25% by eliminating all concessions and deductions.
In the case of PIT, there are only three rates. Unnecessary deductions and exemptions were eliminated.
Regarding indirect taxes, the launch of GST is supposed to raise tax revenues as the rate structure has been optimized with four rates for both goods and services.
Improving tax administration
Tax administration is now the central pillar for improving tax revenues. Several administrative measures were launched to augment tax revenue realization in recent years. Important administrative measures are:
Aadhaar – PAN linkage
Use of digital technology to improve tax administration – project insight, e- way bills, Project Insight, Project Saksham etc.
Project Insight is an income tax department initiative to monitor high value transactions. ‘Project SAKSHAM’, is a New Indirect Tax Network (Systems Integration) of the Central Board of Excise and Customs (CBEC). The Project will help:
The implementation of Goods and Services Tax (GST),
The extension of the Indian Customs Single Window Interface for Facilitating Trade (SWIFT) and
other taxpayer-friendly initiatives under Digital India and Ease of Doing Business of Central Board of Excise and Customs.
tax deducted at source (TDS)/withholding taxes and e-TDS;
adoption of a single identification number (TIN),
taxation of SMEs and wealthier citizens;
increased tax enforcement, including more demands for disclosure and transparency;
review and refinement of tax incentives/exemption/deductions;
tighter transfer pricing regulations and oversight; and
expanding the indirect tax net over more goods and services.
According to the TARC, technological innovations have helped tax administration significantly. PAN based transactions; online tax filings etc., have improved the efficiency of tax administration in the country.