Tax to GDP is an important economic factor that measures the capability of the government in collecting revenued in relation to its size of economy. In layman terms it presents the proportion of a country’s GDP that is taken in form of taxes. This ratio enables an evaluation of the tax system in operation in a country fiscal strength and the capacity of government to fund services and other development needs.
In this blog we will discuss topics related to tax to GDP ratio for India, what it means and the contribution of states to taxes in India. We will also discuss about indirect taxes and their effects on the tax to GDP ratio in India.
Tax to GDP Ratio in India
India always had a relatively low tax to GDP ratio as compared to number of other large economies of the world. In the backdrop of India as a developing country, the structure of tax collection assumes importance because it can provide resources for spending on, social sector innovations, infrastructure development and administration.
India has been maintaining a tax to GDP ratio between 10-12 per cent as against a world average of 15 per cent for developing countries and 30 per cent for developed countries. The current tax to GDP ratio in India is still very low and this may be due to tax avoidance, a huge number of people operating in the informal economy and an ineffective tax base collection. But with additional changes, such as the introduction of the GST and other steps to enhance the tax base, India’s performance in the area is on the rise.
Elements Affecting the Tax to GDP Ratio Case Study: India
Several factors affect the tax to GDP ratio in India, including:
- Size of the Informal Economy: Large parts of the population are contributing through wages in the informal economy where access to the formal tax system remains restricted.
- Tax Evasion: However, challenges still persist, and tax evasion continues to be part of the experience with high-net-worth individuals, as well as traders.
- Tax Administration: The tax collection authorities normally have weak structures that make the process of collecting revenues very slow due to many encumbrances.
- Economic Growth: This means that as a country’s economic growth slows down the measures of tax to GDP change since the overall GDP will reduce.
Tax Contribution of India on the State Basis
Indian constitution provides for both central and state taxation though in the case of India, the former is dominant. Explaining state-wise taxes enables us to capture which states generate the most of the India tax income.
Analyzing the tax contributions of states
- Maharashtra: The maximum number of tax revenues of central income tax originates from Maharashtra thereby making it closest to an industrial and a financial capital as personified by Mumbai city. Till date, Maharashtra has been contributing over 15% of the total tax revenues of India.
- Karnataka: Karnataka being IT hub and having strong manufacturing industries has been contributing high amount towards the Indian central tax revenues. The tech city of Bengaluru is major source for both the Direct and Indirect taxes for the state.
- Delhi: Delhi through his buoyant service sector contributes sizeably to the tax revenues and contributes around 7-8% of total tax revenues in the country.
- Tamil Nadu: Besides being positioned high on the statewise tax return, Tamil Nadu enjoys robust manufacturing, textile, automotive sectors.
- Gujarat: Chemicals, petrochemical and textile industry is well developed in Gujarat and therefore the state has a major share in the tax collections of the country.
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Other Considered Parties
Other leading states for the collection of national tax revenue are Uttar Pradesh, West Bengal, Rajasthan, Andhra Pradesh, etc. But the difference between the more developed states such as Maharashtra and Karnataka and other less developed states is still huge, depicting the states revenue disparity.
The nature of the relationship between Tax to GDP Ratio and Indian States
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Standard measures such as the tax to GDP ratio are normally estimated from the national accounts view, however, state level tax to GDP ratios give a useful profile of the state of the different states. It is observed that more developed states like Maharashtra and Karnataka with comparatively larger per capita income and industrial structure will show higher tax to GDP ratio than comparatively less developed states like Bihar or Uttar Pradesh.
For instance:
It is worth to point out that Maharashtra is one of the most-earning states in tax to GDP terms, primarily due to sizeable GST, excise duties and corporate taxes.
The tax to GDP ratios are low in case of large states like Bihar and Uttar Pradesh where tax collection efficiency is relatively bad and there is lesser economic activity.
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Conclusion
Therefore, the ratio of tax to GDP in India indicates how well the country is in a position to collect taxes also government’s efficiency in providing basic services. Even though India has a relatively low T:GDP ratio compared to the world average, new shocks like GST have been useful in improving the rating for tax revenue. The major contributes of state tax arise from states such as Maharashtra, Karnataka, and Delhi indicating regional disparities in the development of the states.
The second wave of taxation reforms since the early 1990s emerged from the explicit costs of containing fiscal deficit and indirect taxes, particularly the GST have contributed a great deal in raising the tax to GDP ratio and provide structural stability in the Indian economy. With India’s economic development still progressing, effective measures in achieving the tax to GDP ratio for the improvement of tax base, systematic decrease in evasion, and most importantly the upgrade of tax administration will be central to economical development throughout the country.
