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What is tax-GDP ratio? What are the reasons behind India’s low tax-GDP ratio? What implications does it have on the Indian economy?

Topic: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

6. What is tax-GDP ratio? What are the reasons behind India’s low tax-GDP ratio? What implications does it have on the Indian economy? (250 words)

Difficulty level: Moderate

Reference: Indian ExpressInsights on India

Why the question:

One of the stylised beliefs in India, and amongst some leading economic commentators both in India and abroad, is that our tax/GDP ratio is lower than what it “should” be. Many ills are laid at the door of this hypothesised low tax/GDP ratio.

Key Demand of the question:

To write about the tax-GDP ratio, reasons for its lower rate and implications of it.

Structure of the answer:

Introduction: 

Begin by defining tax-GDP ratio.

Body:

In the first part, write about the various reasons as to why India’s tax-GDP ratio is on the lower side – historical, structural, compliance and policy reasons.

Next, write about the potential implications of India having a low tax-GDP ratio.

Next, write the steps that are needed to improve India’s tax-GDP ratio.

Conclusion:

Conclude by writing a way forward.