The percentage of GDP collected as personal income tax paid by individuals has increased from 2.11% in 2014-15 to 2.94% in 2021-22 fiscal year. This suggests that the number of taxpayers has increased due to measures taken by the current government.
Personal Income Tax To GDP Ratio Rises To 2.94% In FY22
- Personal income tax collection (which includes Securities Transaction Tax) has also increased from Rs 2.65 lakh crore in 2014-15 to over Rs 6.96 lakh crore.
- The government has introduced new data sources in the Statement of Financial Transactions (SFT), such as dividend and interest, securities, mutual funds, and information from GSTN.
- As a result, there has been a 1,118 percent increase in reported information, leading to the addition of information on about 3 crore individuals, according to a statement from the finance ministry.
- The number of tax deducted at source (TDS) codes has almost doubled from 36 to 65 in the last eight years, which has led to an increase in the total reported transactions from 70 crore in FY 2015-16 to 144 crore in FY 2021-22. This has resulted in a doubling of the number of unique deductees from 4.8 crore in 2015-16 to 9.2 crore in 2021-22.
Tax-to-GDP Ratio
- The tax-to-GDP ratio measures a country’s tax revenue in comparison to its economy’s size, as determined by its gross domestic product (GDP).
- This ratio is used to gauge how effectively a country’s government allocates its economic resources.
- If a country generates more tax revenues, it can spend more on improving its infrastructure, healthcare, and education, which are critical to its long-term economic and social progress.
- Developed nations tend to have a higher tax-to-GDP ratio than developing nations.
- In 2019, the members of the Organisation for Economic Co-operation and Development (OECD) had an average tax-to-GDP ratio of 33.8%.
- According to the World Bank, a tax revenue level of over 15% of a country’s GDP is a crucial factor for economic growth and poverty reduction.
Tax-to-GDP Ratio of India
- In India, only 1% of the population pays income tax, and there is only one direct taxpayer for every 16 voters.
- The country’s gross tax to GDP ratio, which measures tax revenue as a percentage of economic output, was 11% in FY19, but it fell to 9.9% in FY20 and increased to 10.2% in FY21, partly due to a decline in GDP.
- According to the Budget Estimate (BE) for 2023-24, India’s Tax to GDP ratio is projected to be 11.1 percent, which is expected to remain the same as the Revised Estimate (RE) of 2022-23, which is much lower than the average of 21% for emerging market economies and 34% for OECD countries.
Reasons for low Tax-to-GDP Ratio
- Firstly, there is a large informal or unorganized sector in India which leads to greater tax evasion.
- Secondly, a significant proportion of the population is engaged in agriculture, which is exempt from paying taxes.
- Thirdly, there are a high number of disputes between tax authorities and taxpayers, with one of the lowest proportions of recovery of tax arrears.
- Additionally, India has a lower ratio of direct taxes to indirect taxes compared to most OECD economies.
- The government has also implemented several policies that provide tax exemptions to the richer private sector, which has further reduced the tax revenue.
- Finally, the low per capita income and high poverty levels in India contribute to the low tax-to-GDP ratio.
How to Increase Revenue Collection and Improve the Tax-to-GDP Ratio:
- Expanding the individual taxpayer base.
- Rationalising tax rates can help reduce tax evasion and increase compliance. High tax rates can lead to tax evasion.
- Re-evaluating exemptions provided under various provisions, such as transfer pricing and base erosion.
- Establishing effective dispute settlement mechanisms.
- Raising public awareness about the importance of paying taxes and the benefits of tax revenue can encourage voluntary compliance. This can be done through public campaigns, outreach programs, and tax education programs.
- Complex tax laws and procedures make compliance difficult, leading to non-compliance and tax evasion. Simplifying tax laws and procedures can encourage voluntary compliance and make tax collection more efficient.
- Transparency and accountability in tax administration can build public trust and encourage voluntary compliance. Publishing tax data and enforcing penalties for non-compliance can create a sense of fairness and encourage tax compliance.
- Encouraging digital transactions can help reduce the use of cash and promote transparency. This can help in the tracking of transactions and improve tax compliance.
