‘Tax-to-GDP ratio to hit all-time high of 11.7% of GDP in FY25’

Subject: Economy

Section: Fiscal economy

Context:

India’s tax landscape is anticipated to witness significant growth in the coming fiscal year, with the tax-to-GDP ratio expected to reach a historic high of 11.7%.

About ‘Tax-to-GDP’ Ratio

The tax-to-GDP ratio measures a nation’s tax revenue relative to the size of its economy.
This ratio is used with other metrics to determine how well a nation’s government directs its economic resources via taxation.
Developed nations typically have higher tax-to-GDP ratios than developing nations.
Higher tax revenues mean a country can spend more on improving infrastructure, health, and education—keys to the long-term prospects for a country’s economy and people.
According to the World Bank, tax revenues above 15% of a country’s gross domestic product (GDP) are a key ingredient for economic growth and poverty reduction.

What led to this growth?

Direct Tax Collection
- Optimistic Outlook: Revenue Secretary anticipates a rise in the adoption of the new tax regime, characterized by simplified tax structures and a higher tax-free income threshold.
- Growth in Personal Income Tax: Personal income tax collections have witnessed a substantial 28% growth, with a projected moderation to 20%-22% by the fiscal year-end.
Rationalizing GST Rates
- Ongoing Review: A Group of Ministers (GoM) appointed by the GST Council is reviewing the rate structure, aiming to rationalize GST rates on various items.
- Quarterly Meetings: The GST Council is expected to convene regularly to address rate rationalization, although no fixed date has been announced yet.
Projected Revenue Growth
- Modest Projections: Despite a buoyant revenue growth of 1.4% this year, projections for the following fiscal year aim for a 1.1% buoyancy, aligning with an anticipated nominal GDP growth of 10.5%.
- Corporate Tax Dynamics: The deadline for availing the reduced corporate tax rate ends in March 2023, with a significant proportion of companies already benefitting from it.
- Enforcement Measures: While the Department of Revenue focuses on tax administration, the Enforcement Directorate intervenes in cases related to money laundering, ensuring comprehensive enforcement mechanisms.