The central tax to GDP ratio slid further in FY20 to a 10 year low of 9.88 percent , due to decline in tax collections from custom duties and corporation tax. The ratio stood at 10.97 percent in FY19 and at 11.22 in FY18.
It determines the extent to which the government is able to finance its expenditure from tax collections. Developed countries have higher contribution of tax to their GDP. With 1.5 trillion shortfall in collections, the gross tax revenue fell to 3.39 percent in FY20.
What is tax to GDP ratio?
The Tax-GDP ratio represents the size of a country’s tax to it’s GDP. It is a representation of the size of the government’s tax revenue expressed as a percentage of the GDP. Higher the tax to GDP ratio the better financial position of the country. The ratio represents that the government is able to finance its expenditure. It reduces a government’s dependence on borrowings.
India, despite seeing higher growth rates, has struggled to widen the tax base. Lower tax-to-GDP ratio restricts the government to spend on infrastructure and puts pressure on the government to meet its fiscal deficit targets.
The tax to GDP ratio will need growth of 20.5 percent in FY21 to meet the Budget target for the year. GDP growth for FY20 fell to an 10-year low of 4.2 per cent.
Aditi Nayar, principal economist at ICRA, said the cut in corporate tax rates compounded the impact of the economic slowdown on overall collections, while high gold prices shrunk gold demand and dampened Customs duty inflow.
CBDT’s note said that Rs 1.84 lakh crore was given as refunds in the 2019-20, as compared to Rs 1.61 lakh crore in 2018-19, an increase of 14 per cent. Apart from this, the lowering of corporate tax rates and exemptions in the income tax structure has impacted revenue collection by Rs 1.45 lakh crore and Rs 23,200 crore, respectively, the note said.
While tax collections in FY21 through FY23 are expected to grow in double digits, the tax-to-GDP ratio is expected to remain around 10.7 per cent in FY23.
“We estimate a 30 per cent shortfall in Central taxes, relative to the Budget Estimate for FY21,” said Nayar.