GS Paper III

News Excerpt: As per the Revenue Secretary, India’s Tax-to-GDP ratio is expected to hit a record high of 11.7% of GDP in 2024-25.

Reasons for increase in India’s Tax-to-GDP ratio:

• Equitable Direct Taxes: The expected increase is because of direct taxes increasing from 6.1% of GDP in 2022-23 to 6.6% this year and 6.7% next year, which is more equitable.
• Government's Simplification Efforts: The government is actively working to simplify and rationalize the tax regime, aiming to reduce disputes, litigation, and intrusive enforcement methods.
•  Reduction in Corporate and Personal Income Taxes: The corporate and personal income taxes have been recently reduced, and it is hoped that a high proportion of income tax payers will opt for the new tax regime that doesn’t allow deductions but offers a higher tax-free income threshold.
• Economic Growth and Per Capita Income: As the economy grows and per capita income increases, as per other countries’ experience, the Tax to GDP ratio also increases and more so when a country is developing, with the pace of increase in taxes more than that of the GDP.

Why did Tax Buoyancy dip despite an increase in Tax-to-GDP ratio?

The tax buoyancy in India dipped in 2022-23, with the growth rate of taxes in relation to the economy’s nominal growth rate declining to 1.18 from 2.52 in 2021-22. This dip in tax buoyancy can be attributed to several factors, including:

• Low base effect: The tax buoyancy had improved to 2.52 in 2021-22 due to a low base effect, which led to a faster growth in taxes compared to the country’s national income. However, in 2022-23, the tax buoyancy inched lower as the effect of the low base diminished.
• Decline in tax collections growth rate: Although the growth rate for taxes was recorded at 17.79% in 2022-23, it was higher than the 15.11% nominal GDP growth rate, leading to a decrease in tax buoyancy.
•  Increase in tax base: The number of persons filing income tax returns increased to 7.4 crore in 2022-23, up 6.3% from the previous year. However, the corresponding data for taxpayers was not available, indicating that a significant number of taxpayers are getting taxed through measures such as TDS but are not filing income tax returns. This increase in the tax base might have contributed to the dip in tax buoyancy.

Conclusion:

Despite the dip in tax buoyancy, India's expected record-high tax-to-GDP ratio of 11.7% in 2024-25 reflects positive strides. The government's focus on equitable taxation, simplification efforts, and increased tax base sets a promising trajectory for fiscal growth.

Prelims PYQ

Q. Consider the following statements: (UPSC 2017)

1. Tax revenue as a percent of GDP of India has steadily increased in the last decade.
2. Fiscal deficit as a percent of GDP of India has steadily increased in the last decade.

Which of the statements given above is/are correct?

(a)    1 only

(b)    2 only

(c)     Both 1 and 2

(d)    Neither 1 nor