India has made a quantum leap in Tax-to-GDP ratio in 2021-22 to reach a level of 11.7%. Tax to GDP ratio of 15% is said to be the tipping point for any country’s developmental trajectory. Some researchers have estimated that over 10 years, per capita GDP is 7.5 percent larger than would otherwise be expected in countries with tax revenues above the 15 percent ‘tipping point’. Below this level, key aspect for pushing for higher economic growth is increasing domestic resource mobilisation (DRM) and getting to 15% level of Tax-to-GDP ratio helps any country in generating sufficient domestic resources to invest in healthcare, education, and infrastructure. Therefore taking this ratio above 15% is a key ingredient for economic growth and, ultimately, poverty reduction.
India’s post pandemic recovery in tax collection is very remarkable even when looked from recent trends perspective. Ratio had fallen to 9.9% in 2019-20 from 11% in 2018-19. Last year, due to poor GDP it had increased to 10.2% and now with significant jump in economic activities, indicating robust recovery the jump of tax ratio to 11.7% is indeed a great news. India’s total tax revenue jumped 34% to ₹27.07 lakh crore in 2021-22, around ₹5 lakh crore more than the Budget estimate. This is clearly indicating the rapid recovery of the economy last year, and also efficient tax administration.
The key ingredients to this increase in tax collection are initiatives under Digital India and simplified corporate taxation. Measures related to ease of compliance and the use of data analytics and artificial intelligence to check evasions have laid the foundation for modern, convenient and transparent taxation system. Gross corporate taxes during 2021-22 were ₹8.6 lakh crore against ₹6.5 lakh crore last year, which shows that the new simplified tax regime with low rates and no exemptions has lived up to its promise thereby enhancing Ease of Doing Business. The number of corporate tax returns filed by businesses increased by 43,000 to over 986,000 .
It is also heartening to see that more of this tax growth is coming from direct taxes. Direct taxes play bigger role in reducing socio-economic inequality. This 11.7% includes a direct tax to GDP ratio at 6.1% and indirect tax to GDP ratio at 5.6%, the ministry added. According to provisional data released on Thursday , the revenue collection is led by 49% growth in direct taxes and 20% growth in indirect taxes. Total direct tax collection in the financial year ended March 31 was ₹14.10 lakh crore and indirect tax, ₹12.90 lakh crore.
It is common observation that as countries develop and income level rises, the ask from government for healthcare, public transportation, education etc rises rapidly and to fulfil that higher Tax-to-GDP ratio is instrumental. Developed countries have this ratio upwards of 30%, unless they have a huge contribution from non-tax revenue source like oil fields etc. In this light, efforts towards making India $5 trillion economy, thereby a global economic powerhouse, have started bearing fruits as directly reflected in India’s GDP growth in recent years.
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