Wednesday, February 24, 2016

Tax to GDP Ratio

Tax to GDP ratio is the ratio of taxes collection against nation GDP. It tells about how a unit change in GDP will contribute to the revenue of govt. In India it is at lower rate i.e. 17% while OECD average is 24%. In Scandinavian countries it is as high as 50%. In India it is on the lower side because-
1) Lots of people are not earning well and hence did not com in the direct tax bracket. Only 3% pay income tax.
2) Lowering the tax slab will increase administration cost and also regressive with low saving in hand.
3) Large unorganised sector and loopholes in tax structure.
To increase the spending of govt towards social sector, infra and public service India must increase its tax/GDP ratio, not by increasing tax rate or decreasing tax slab but by-
1) Increasing the income of its citizens through MII, SISI, etc
2) By ease of dong business and lesser bureaucratic hurdles.
3) Mending loopholes in ta policy by transparent and stable tax policy, GAAR and MAT and reducing exemption.
We must also try to increase direct tax against indirect tax because indirect tax does not differentiate b/w rich and poor and is regressive in nature, reduces saving in hands of poor. We must move towards GST so as to remove cascading effect of tax and increase revenue. Increase in tax GDP ratio will-
1) Increase revenue per unit increase of GDP
2) More income to govt for providing better services
3) Poor will be benefited more through increased govt expenditure.
4) Help in achieving fiscal deficit target hence better ratings-so more FDI-more jobs
Hence increasing tax-GDP ratio will benefit India to become a stable economy with poor benefiting the most.

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