India’s Tax-to-GDP Ratio Touches 19.6%, Structural Reforms Crucial for Further Improvement: Report

New Delhi- India’s combined tax-to-GDP ratio has climbed to 19.6 per cent, bringing the country on par with several major global economies and underscoring steady improvements in tax collection efficiency, according to a report by Bank of Baroda.

The ratio, which includes both Central and state tax revenues, is higher than that of several emerging economies such as Hong Kong, Malaysia and Indonesia. While India’s Central gross tax revenue alone stands at 11.7 per cent of GDP, the consolidated figure reflects stronger state-level participation and improved compliance across the overall tax system.

Despite the progress, India continues to lag behind advanced economies. Germany’s tax-to-GDP ratio is close to 38 per cent, while the United States stands at around 25.6 per cent. Bank of Baroda noted that this gap represents a significant policy opportunity for India, particularly given its favourable demographic profile and growth potential.

The report highlighted that the government is increasingly prioritising comprehensive tax reforms focused on simplification, rationalisation and digitisation. These measures are expected to further raise the tax-to-GDP ratio in the coming years.

Key regulatory initiatives, including the proposed Income Tax Act, 2025, and the rationalisation of corporate tax structures, are likely to enhance transparency and ease of compliance. The new Income Tax Act, scheduled to come into force from April 1, 2026, is also expected to broaden the tax base by gradually bringing more of the informal economy into the formal fold.

A historical analysis in the report shows that tax collections and nominal GDP have begun moving more closely in tandem over time. Between FY93 and FY02, the relationship was volatile due to a narrow tax base. However, from FY14 onwards, a clear convergence has emerged, becoming more pronounced from FY23.

Recent data indicate that tax elasticity is around 1.1, higher than the long-term average, suggesting that tax revenues are growing faster than the overall economy.

The report also identified a strong positive relationship between different tax components and key macroeconomic indicators. Income tax collections show a robust correlation with nominal GDP and per capita income, reflecting rising earnings and improved compliance. Corporate tax collections have similarly benefited from better corporate profitability, with buoyancy levels remaining strong compared to historical trends.

— IANS