The ratio of central taxes to GDP slid further in FY20 to a 10 year low of 9.88 percent, driven by a decline in collections from customs duties and corporation tax, while excise duty posted marginal growth. This was despite the fact that only a week was under lockdown in the year. The ratio stood at 10.97 percent in FY19, and at 11.22 percent in FY18. It is only estimated to decline further, with revenues falling on account of a slump in economic activity.
While the ratio determines the extent to which the government is able to finance its expenditure from tax collections, it is also an indicator of tax compliance. Developed countries have a higher contribution of tax to their GDP. The Centre’s gross tax revenue fell 3.39 percent in FY20, with a Rs 1.5 trillion shortfall in collections, as against the revised Budget target for the year. It will need a growth of 20.5 percent in FY21 to meet the Budget target for the year.
GDP growth for FY20 fell to an 11-year low of 4.2 percent. A higher tax to GDP ratio indicates the tax base is increasing along with growth in the GDP. The government has taken a slew of measures to improve compliance, which include the introduction of GST and electronic assessment by tax officers. A lower ratio, however, restricts the government’s capital spending, given that puts pressure on the fiscal deficit. Corporation tax revenue fell 16 percent in FY20 and Customs revenue declined by 7 percent, even as excise collections grew 3 percent.
India is way behind OECD members in terms of the tax GDP ratio an average of 34 percent. In fact, the share of tax revenue in the Centre’s revenue receipts fell to 81.3 percent in FY20, from 85.8 percent in the previous year and 84.3 percent in FY18. The direct tax to GDP ratio fell to its lowest in 14 years, at 5.1 percent, while the indirect tax to GDP ratio was at a 5-year low in FY20. The share of corporation tax in gross tax fell to 27.7 percent at least a 10-year low. Further, the share of customs duties in gross tax fell to 5.43 percent in FY20, from 5.66 percent in FY19.