The tax ratio to GDP is extremely important for the economic health of a country and influences various aspects. During the budget period, a time closely watched by experts and policymakers, understanding the impact is critical. Here, Times Now explains how it becomes important to know using a comparative analysis.
Budget: Decoding the Tax-GDP Ratio and Unraveling Its Importance for the Indian Economy (Image Source: iStock)
In recent years, India's GDP (Gross Domestic Product) has witnessed significant growth, but the growth of gross tax ratio to GDP has remained at a snail's pace. For example, the tax-to-GDP ratio fell from 11 percent in FY19 to 9.9 percent in FY20. Due to the overall economic downturn caused by Covid-19, the ratio improved slightly to 10.2 percent in FY21. Apart from the economic disruptions, India has long faced the challenge of improving the tax ratio, which is essentially the national treasury, which will have a long-term impact on the economy.
Since the tax rate can have a huge impact on the entire economic landscape of the country. It will be important to know about this during the budget period. Which are currently largely being observed by experts.
What is the Tax to GDP Ratio?
The tax rate is the share of tax revenue that the state generates in the country's GDP. For example, the tax to GDP ratio was 19 percent in fiscal year 2019, meaning the government receives 19 percent of its GDP as tax contribution from the public and businesses.
Importance of Tax to GDP Ratio?
A higher tax rate indicates a strong economy where tax revenues increase with overall GDP growth. This ratio reflects the wealth of the state treasury. The government's ability to finance various programs, including socioeconomic development, military, salaries and pensions, depends on the tax to GDP ratio.
A higher ratio indicates a stronger financial position of the country and shows the government's ability to finance its expenditures. A solid tax-to-GDP ratio allows the government to diversify its fiscal resources, thereby reducing the need for large-scale borrowing.
What is the ideal tax to GDP ratio?
The tax to GDP ratio must be sufficient revenue for the government to cover its expenses, therefore the tax to GDP ratio should be sufficient for all necessary purposes. In developed Western countries this rate is higher, averaging 34 percent of their GDP. This allows them to provide funds for hospital costs, free schooling and more.
In India, the tax rate is comparatively lower than several other countries. India has failed to expand the tax base, limiting government spending on infrastructure and putting pressure on achieving fiscal deficit targets. While there have been improvements, they are still well below the developed country average.
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