Budget 2024 estimates show that the ratio of taxes collected by the Centre to GDP will likely touch 11.6 percent in the current financial year and breach the 12 percent-mark in the next. India’s overall tax (including state taxes) to GDP is around 18 percent, and it has traditionally been around these levels for quite some time. It is a long-held belief that Indians pay less tax to the government than they should. However, the government claims India’s current tax-to-GDP ratio is much better than many countries with similar per capita income. According to Union revenue secretary Sanjay Malhotra, India should now aim for a higher tax-to-GDP ratio of 30 percent, to be on par with developed countries. Such a high ratio is possible only when India achieves per capita income levels of the developed world. Also, the European level of tax-to-GDP ratio punishes the economy through high taxes and India should be careful while setting such benchmarks. Even the world’s largest economy—the US—has a tax-to-GDP ratio of 25 percent. In China, it is around 21 perent.
Higher tax-to-GDP is a function of multiple factors, the foremost being per capita income. Higher per capita income means a general higher level of prosperity and hence more people can pay taxes. However, higher tax rates, multiple levels of taxes, and lower threshold for taxing incomes can also result in higher tax/GDP ratio. In countries like India, where per capita income is $2,500 or lower, taxes on individual income make for a smaller fraction of tax collected. A larger quantum of tax is collected through consumption taxes like Goods and Services Tax. In India, direct taxes – corporate and personal income tax – account for only 35-37 percent of total taxes collected by the Centre and States. Consumption taxes—which do not differentiate between the rich and poor—account for 65 percent.
Higher tax rates can punish both businesses as well individuals. India already has a tax-to-GDP ratio of 18 percent, which is higher than the 15 percent or more stipulated by the World Bank to ensure economic growth and poverty alleviation. For a country with a high young population, India needs businesses to flourish for generating employment, and high consumption for businesses to flourish. Punishing tax rates or taxes at multiple levels could derail both. Therefore, any attempt to increase the tax-GDP ratio should be by expanding the taxpayers’ base instead of having a tax system that is extortionist in nature. Also, higher taxes must come with better government services.