Taxes are one of the major source of revenue for the government. The government levies taxes on its nationals in order to invest in resources that would enable a country to grow at a steady rate in the long-term.
Taxes are levied on goods, services, imports, personal income, wealth and corporate income. Lets look at the Indian government's performance in terms of taxes.
India, as a country, is among the economies that have lowest tax to GDP ratio (total government tax collections divided by the country's GDP). The central government tax to GDP ratio stood at 7.3% in FY03, which is much lower than most of the developed countries. The following graph gives a picture of how over the years this ratio has moved.
The tax to GDP ratio in India is quiet low compared to other countries in the world. While countries like Sweden has a tax to GDP as high as 54%, ours is amongst the lowest. Among the developing countries too, India's Tax to GDP ratio is the lowest.
Data Pertains to Federal/Central Government tax collection
To understand why we have such low percentage ratios, we need to understand the breakup of tax revenues. Unlike developed countries, majority of tax revenues is from indirect taxes, which mostly constitutes excise and customs duty.
From the following figure, it can be noted that excise contributes to about 39% of tax revenues of the government. Since the share of manufacturing in the GDP has been on the decline, the tax receipts have not grown in line with the GDP.
It has to be remembered that though the industrial sector account for only 25% of the GDP, this sector account for an estimated 2/3rd of tax burden. If one were to look at the key growth drivers of GDP in the last five years, the push has come from the services sector, which is taxed marginally at the current juncture.
Added to this, agricultural income is also tax-free. Overall, one has to view this tax to GDP ratio of India with this backdrop.
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