Business News | India's Tax-to-GDP Ratio Mirrors Major Economies as Structural Reforms Drive Revenue Convergence: Report
Get latest articles and stories on Business at LatestLY. A report from Bank of Baroda highlights that this gap represents a significant policy opportunity, as India possesses larger potential due to favourable demographics. The report notes that more efforts are being directed towards holistic tax reforms, including simplification, rationalisation, and digitisation, with signs of an improving tax-to-GDP ratio in the near term.
New Delhi [India], January 24 (ANI): India's combined tax-to-GDP ratio, accounting for both central and state collections, currently stands at 19.6 per cent, positioning the country at par with several major global economies. While the central gross tax revenue remains lower at 11.7 per cent, the integrated figure exceeds those of other emerging markets such as Hong Kong, Malaysia, and Indonesia.
However, the ratio still lags behind advanced economies like Germany and the United States, which report ratios of 38 per cent and 25.6 per cent, respectively.
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A report from Bank of Baroda highlights that this gap represents a significant policy opportunity, as India possesses larger potential due to favourable demographics. The report notes that more efforts are being directed towards holistic tax reforms, including simplification, rationalisation, and digitisation, with signs of an improving tax-to-GDP ratio in the near term.
Key regulatory changes, including the enactment of the Income Tax Act 2025 and the rationalisation of corporate tax structures, aim to improve transparency and streamline compliance.
Historical analysis shows a growing consonance between tax collections and nominal GDP. Following a period of volatility between FY93 and FY02 due to a narrow tax base, the relationship has shifted toward directional convergence.
"From FY14 till date, there have been visible signs of convergence between Gross tax revenue collections and nominal GDP with convergence being more pronounced from FY23 onwards," the report states. Current data indicate that the tax elasticity is 1.1, above the long-run average.
The report further establishes a strong positive correlation between tax components and macroeconomic variables. Income tax collections show a high correlation with both nominal GDP and per capita income.
According to the report, "improving financial earnings of corporates have been positive for corporate tax collection," as evidenced by buoyancy levels that remain significant compared to long-term averages.
Statistical testing through the Granger Causality test confirms a mutual relationship where "Tax does Granger Cause GDP, and GDP does Granger Cause Tax".
Despite this, the report finds that long-run cointegration is not significant, suggesting that revenue growth remains heavily "contingent on structural reforms" rather than simple economic expansion. The upcoming implementation of the Income Tax Act 2025 on April 1, 2026, is expected to further bolster these collection numbers by targeting the informal economy and enhancing efficiency. (ANI)
(The above story is verified and authored by ANI staff, ANI is South Asia's leading multimedia news agency with over 100 bureaus in India, South Asia and across the globe. ANI brings the latest news on Politics and Current Affairs in India & around the World, Sports, Health, Fitness, Entertainment, & News. The views appearing in the above post do not reflect the opinions of LatestLY)