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Study: OECD countries see sharp downturn in tax collection
December, 24th 2010

Tax collections in advanced economies are declining sharply because of rising unemployment and slowdown in economic activity even as corporates and individuals in certain economies like India pay more tax.

While collection by way of direct taxes as well as indirect taxes tend to grow at 10 to 15 % in India, tax-GDP ratio is decreasing alarmingly in most developed countries as the fallout from the economic downturn of 2008 continues to linger even now.

A recent study by Organisation for Economic Co-operation and Development (OECD) clearly states that the economic downturn has hit the tax revenue collection of its member countries.

The figures compiled by the body that has 34 countries as members with an additional four countries as observers, show that the tax-GDP ratio has been affected adversely since 2008.

A higher tax-GDP ratio is a sign of economic development and a more equitable distribution of wealth. Besides economic growth, it also shows a higher level of compliance by citizens. Also, the tax-GDP ratio tends to be higher in countries that have a well established social security system.

According to the OECD note, most member countries that tax revenues as a share of GDP are moving towards the lowest since 1990s. In 2007, the OECD countries' tax to GDP ratio was 35.4%, but fell to 34.7% in 2008 and again to 33.7% in 2009. The OECD estimate is inclusive of all taxes, including state and indirect taxes.

In 2008, the tax-GDP ratio fell in 17 countries and increased in seven. The overall average fell by one percent, from 2008 to 2009, below 34%. This is the lowest avenge tax burden since the early 90s. India's tax to GDP ratio is 17 % of GDP, very low compared with that of countries like Denmark where the ratio is as high as 50%. The ratio is over 28% in the US and above 30% in Australia. Central Board of Direct Taxes chairman SSN Moorthy said "Our ratio should go up. Thankfully, it has been steadily going up."

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