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Direct Tax to GDP Ratio

Facts for Prelims (FFP)

 

Source: BS

 Context: During the fiscal year 2022-23, the share of direct taxes in India’s gross domestic product (GDP) reached a 15-year high of 6.11%.

 

What is the Direct Tax to GDP ratio?

The Direct Tax to GDP ratio is a financial metric that represents the percentage of a country’s gross domestic product (GDP) contributed by direct taxes. A higher ratio implies a larger share of tax revenue relative to the overall economic activity. It gives an estimate of a country’s ability to mobilise resources to fuel its development. Direct taxes contributed over 54% to the overall tax collection during FY23.

 

Other facts:

The Tax Buoyancy decreased from 2.52 to 1.18 compared to the previous year. Tax buoyancy measures the efficiency of tax collection in response to GDP growth. It signifies buoyancy when tax revenues increase more than proportionately with GDP growth, even if tax rates remain constant.

 

 In India, central-level direct taxes include personal and corporate income taxes under the Income Tax Act of 1961. However, India’s tax-to-GDP ratio is notably low, ranking much below countries like OECD members with an average tax-to-GDP ratio exceeding 30%. This is attributed to factors such as the dominance of the informal sector, tax evasion, and various exemptions and incentives.