Interim Budget 2024: What is tax-to-GDP ratio & where does India fare on this?

India's gross tax-to-GDP fell from 11% in FY19 to 9.9% in FY20. Owing to a decline in the overall GDP marred by Covid-19 troubles, the ratio improved to 10.2% in FY21. For years, India has struggled to increase its tax-to-gdp ratio, a marker of how well the government controls a country's economic resources.

A low tax-to-GDP ratio poses significant challenges for the government to spend money on creating necessary infrastructure in the economy and raise investment.

Slowing economic growth in the current fiscal has raised questions on meeting the tax collection target. This could further hurt India's tax-to-GDP ratio.

Let's take a look at what exactly tax-to-GDP ratio means:

1. What does the tax-to-GDP ratio signify?
   The tax-to-GDP ratio represents a country's tax kitty relative to its GDP, indicating the government's ability to finance its expenditure. A higher ratio denotes a wider fiscal net and reduced dependence on borrowings.
2. How does India fare in terms of tax-to-GDP ratio globally?
   India has shown improvement in its tax-to-GDP ratio over recent years. However, it remains notably lower than the OECD average of 34%. Developed countries tend to exhibit higher ratios compared to developing counterparts.
3. What measures can potentially boost India's tax-to-GDP ratio?
   Enhancing tax compliance, implementing the Direct Tax Code, and rationalizing GST could contribute to increased revenue. However, sustained elevation of the ratio hinges on driving economic growth through strategic budgetary initiatives.
4. What challenges does a lower tax-to-GDP ratio pose for India?
   A lower ratio poses challenges for the government's spending on critical infrastructure and investments. It also strains fiscal deficit targets and constrains expenditure despite robust economic growth.
5. What trend has India observed in its tax-to-GDP ratio in recent years?
   India's direct tax-to-GDP ratio has shown an upward trend, climbing from an average of 5.5% in FY12-FY21 to 6.08% in the last fiscal year. However, it remains below the 6.3% ratio achieved in 2007-08, indicating room for improvement.