NewKerala.com

India's Tax-to-GDP Ratio Matches Major Economies, Reforms Drive Growth

India's combined tax-to-GDP ratio stands at 19.6%, positioning it alongside several major global economies though still behind advanced ones like the US and Germany. A Bank of Baroda report highlights this gap as a policy opportunity, driven by favourable demographics and ongoing structural reforms. Key regulatory changes, including the upcoming Income Tax Act 2025, aim to improve transparency, streamline compliance, and target the informal economy. The report notes a visible convergence between tax revenue and nominal GDP, with a current tax elasticity above the long-run average.

Key Points: India's Tax-to-GDP Ratio on Par with Global Peers: Report

  • India's tax ratio at 19.6%
  • Lags behind US and Germany
  • Reforms and digitisation key drivers
  • New Income Tax Act 2025 upcoming
  • Strong correlation with GDP growth
2 min read

India's tax-to-GDP ratio mirrors major economies as structural reforms drive revenue convergence: Report

India's combined tax-to-GDP ratio reaches 19.6%, matching major economies. Structural reforms and new tax laws aim to boost revenue further.

"Tax does Granger Cause GDP, and GDP does Granger Cause Tax - Bank of Baroda report"

New Delhi, January 24

India's combined tax-to-GDP ratio, accounting for both central and state collections, currently stands at 19.6 per cent, positioning the country at par with several major global economies. While the central gross tax revenue remains lower at 11.7 per cent, the integrated figure exceeds those of other emerging markets such as Hong Kong, Malaysia, and Indonesia.

However, the ratio still lags behind advanced economies like Germany and the United States, which report ratios of 38 per cent and 25.6 per cent, respectively.

A report from Bank of Baroda highlights that this gap represents a significant policy opportunity, as India possesses larger potential due to favourable demographics. The report notes that more efforts are being directed towards holistic tax reforms, including simplification, rationalisation, and digitisation, with signs of an improving tax-to-GDP ratio in the near term.

Key regulatory changes, including the enactment of the Income Tax Act 2025 and the rationalisation of corporate tax structures, aim to improve transparency and streamline compliance.

Historical analysis shows a growing consonance between tax collections and nominal GDP. Following a period of volatility between FY93 and FY02 due to a narrow tax base, the relationship has shifted toward directional convergence.

"From FY14 till date, there have been visible signs of convergence between Gross tax revenue collections and nominal GDP with convergence being more pronounced from FY23 onwards," the report states. Current data indicate that the tax elasticity is 1.1, above the long-run average.

The report further establishes a strong positive correlation between tax components and macroeconomic variables. Income tax collections show a high correlation with both nominal GDP and per capita income.

According to the report, "improving financial earnings of corporates have been positive for corporate tax collection," as evidenced by buoyancy levels that remain significant compared to long-term averages.

Statistical testing through the Granger Causality test confirms a mutual relationship where "Tax does Granger Cause GDP, and GDP does Granger Cause Tax".

Despite this, the report finds that long-run cointegration is not significant, suggesting that revenue growth remains heavily "contingent on structural reforms" rather than simple economic expansion. The upcoming implementation of the Income Tax Act 2025 on April 1, 2026, is expected to further bolster these collection numbers by targeting the informal economy and enhancing efficiency.

- ANI

Share this article:

Reader Comments

S
Sarah B
Interesting analysis. The gap with Germany/US shows there's a long way to go, but the trajectory seems positive. The key will be ensuring this increased revenue translates into better public services and infrastructure for all citizens.
V
Vikram M
Good to see we are ahead of some emerging markets. But 19.6% still feels low when you consider the size of our informal economy. Bringing more businesses into the tax net is crucial. The 2025 Act targeting the informal sector is a step in the right direction.
P
Priya S
While the numbers look good on paper, the common man's experience is different. The tax burden on salaried employees is still high with fewer deductions. Hope the reforms also focus on rationalising tax slabs to put more money in people's hands.
R
Rohit P
The correlation with GDP growth is promising. A growing economy should mean more revenue for development projects. But we need to be careful - higher taxes shouldn't stifle the growth they depend on. It's a delicate balance.
M
Michael C
The report's point about revenue being contingent on structural reforms, not just expansion, is critical. Simplification and digitisation can reduce evasion and improve efficiency. India's demographic dividend is a huge advantage if harnessed correctly.

We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.

Leave a Comment

Minimum 50 characters 0/50