Economic growth results in Tax GDP ratio to a 7 year low.

Category: Global Economy Sub-category: Indian Economy
Document type: news

26-Aug-2011 | 16:00 IST | Edited by: Vishal Bagaria

Statisticians estimate the cause for the combined ratio of tax to gross domestic product (GDP) of the central and state governments dipping to a seven-year low of 14.73% in 2010-11 to be increasing expansion in the size of the economy, leading to a lower ratio despite a rise in tax proceeds.

The sum of tax revenue shot up to 17.5% to Rs 11.6 lakh crore in 2010-11, versus the 7.9% growth in 2009-10. In spite of this, a fall in the tax to GDP ratio was observed, reflecting the combined effect of economic growth and inflation, according to economists, and this was declared to be a healthy growth rate for the economy.

Budget estimates and the sources from the archives of the Ministry of Finance reveal that while the direct tax to GDP ratio was 5.48% in 2010-11 at a four-year low, the indirect tax to GDP ratio was 9.25%, higher than in 2009-10 when it was 9.15%.

Tax-GDP Ratio
Source: Ministry of Finance, Govt. of India

The severing of the tax ratio into the Centre's and states' numbers show that the Union Government tax-GDP ratio, after devolution of tax funds to states, was at an eight-year low of 6.8%. Of this, the direct tax-GDP ratio was just 3.76% and the indirect tax-GDP ratio was a mere 3.02%. However, if 2009-10 is excluded, the Centre's net indirect tax-GDP ratio was at a 50-year low, given the data in the archives. According to economists, the main contributing factor to the GDP was the services sector. However, a major part of it being unorganised, taxes cannot be yielding by them.

Meanwhile, the states' tax-GDP ratio is at a 12-year low of 5.25%. Of this, the direct tax-GDP ratio was just 0.12% during 2010-11, the same as the year before. However, states do not have direct tax as their major source of revenue; the major bit comes from indirect taxes. Their indirect tax-GDP ratio was at a 11-year low of 5.13%.

After states switched to a value added tax (VAT) regime from one based on sales tax from April, 2005, the indirect tax-GDP ratio rose to 5.86% during 2005-06 from 5.69% in 2004-05. A year later, the ratio shot up to 5.98%. Post that, the ratio has been steadily on the decline.

However, if the absolute indirect tax purse is taken into account, revenues of states increased by 87% in the post-VAT implementation scenario. This is a staggering figure, compared to just 4.4% p.a. in the preceding five years.

External Links:
Official website of the Income Tax Dept., Govt. of India.

Official website of the Ministry of Finance, India.