India’s tax-to-GDP ratio reaches 19.6 pc, structural reforms key to further gains: Report

India’s combined tax-to-GDP ratio has risen to 19.6 per cent, matching levels seen in numerous large economies worldwide and demonstrating consistent improvements in tax administration efficiency, as stated in a Bank of Baroda analysis.

This comprehensive ratio encompasses tax receipts from both central and state governments and exceeds figures recorded in emerging markets including Hong Kong, Malaysia, and Indonesia.

The analysis indicates that although India’s central gross tax revenue remains comparatively lower at 11.7 per cent of GDP, the collective performance signals enhanced state-level contributions and more effective nationwide compliance.

Despite these gains, India still lags behind developed nations like Germany (approximately 38 per cent tax-to-GDP ratio) and the United States (around 25.6 per cent).

Bank of Baroda emphasized that this differential represents a significant policy opportunity for India, particularly given its advantageous demographic structure.

The report highlighted ongoing nationwide tax reforms centered around streamlining processes, structural adjustments, and digital transformation. These initiatives are projected to further elevate the tax-to-GDP ratio in subsequent years.

Notable policy measures, including the upcoming Income Tax Act, 2025, and corporate tax framework optimizations, are anticipated to enhance system transparency and compliance efficiency.

The new Income Tax legislation, set for implementation from April 1, 2026, is additionally expected to expand the tax base by integrating more informal economic activities into the formal taxation system.

Historical evaluations in the report reveal increasingly synchronized movement between tax collections and nominal GDP over time.

Early periods (FY93-FY02) showed greater volatility due to limited tax coverage. Recent years (from FY14 onward) display stronger alignment, with particularly notable convergence observed since FY23.

Current metrics suggest tax elasticity currently stands at approximately 1.1 – exceeding historical averages and indicating tax revenue expansion outpacing economic growth.

The analysis additionally identifies robust correlations between different tax categories and macroeconomic indicators:

Income tax receipts demonstrate significant alignment with both nominal GDP and per capita income – evidence of increasing earnings and enhanced compliance. Corporate tax collections similarly reflect strengthened corporate profitability, maintaining higher revenue buoyancy compared to historical patterns.

(With inputs from IANS)