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Tax-GDP ratio needs an eye watch
February, 06th 2007

The Centres coffers have been bulging as a result of increasing tax revenues since the beginning of this year. However, as a percentage of GDP, the combined tax revenues of the Centre and the states are still low in India, when compared to developed economies, including the US and the UK, and some emerging economies such as Brazil and Russia.

Indias overall tax revenue as a percentage of GDP is around 17%, if budgeted estimates are taken into account. The tax-GDP ratio for the US and UK, however, is estimated to be around 27% and 37% respectively. Brazil, too, has a high tax-GDP ratio of around 37%. Chinas tax-GDP ratio marginally exceeds Indias by one percentage point.

Tax revenues have increased globally largely because of high GDP growth across developed and developing economies. According to a report by OECD in October 2006, tax-GDP ratio has risen in many OECD countries because of stronger economic growth, leading to higher corporate profits and efforts by some countries to offset the effect of tax cuts by broadening the tax base and improving compliance.

Indias tax-GDP ratio has been increasing steadily since the last couple of years, as a result of an expansion of the tax base and improvement in the economic climate. In India, there is a large difference in the sectors that contribute to the GDP and those that contribute to the Centres tax kitty. For instance, services account for more than half of Indias GDP, while service tax contributes barely 8% of the gross tax revenues of the Centre. However, with a larger number of services being brought under the tax net every budget, this ratio is slated to improve.

In India, tax revenues of the Centre account for around 11% of the GDP at current market prices while state taxes account for around 6% of the GDP. Both central and state taxes have increased in the last couple of years. The Centres direct tax collection has been growing at a much faster pace than its indirect tax collections in recent times. 
With each passing year, the gap between direct and indirect taxes has narrowed considerably. Both now contribute nearly the same amount to the total tax kitty of the Centre, direct taxes kicking in marginally lower than indirect taxes, if budgeted figures for the current financial year are taken into account.

The faster growth of income and corporation taxes as compared to excise and customs duty collections is on account of trade liberalisation and rationalisation of taxes over the years. Such a trend, in tune with the global trend, is also considered to be more equitable. Indirect taxes do not vary depending on the income of the taxpayer the excise duty levied on a box of matches and finally collected from its buyer is the same, whether its buyer is a casual labourer or a billionaire.

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