DIRECT TAX TO GDP RATIO ROSE TO 15-YEAR HIGH

Direct Tax to GDP ratio rose to 15-year high in FY23 Central Board of Direct Taxes data shows. 

• Direct Tax to GDP ratio reached a 15-year high at 6.11% of GDP in FY23. 
• Direct Tax to GDP ratio gives an estimate of a country’s ability to mobilise resources to fuel its development. 
• Tax Buoyancy, however, declined from 2.52 to 1.18 compared to the previous year. 
  • Tax buoyancy indicates the measure of efficiency or responsiveness in tax collection in response to the growth in GDP. 
  • Tax revenues are considered as buoyant when they increase more than proportionately in response to the increase in GDP even when the rates of taxes remain unchanged. 
  • The recent decline indicates that the current economic growth did not lead to as much of an increase in direct tax collections for FY 23 as seen in FY22. 
• Gross direct tax collections increased by over 173% to Rs 19.72 trillion in FY23 from Rs 7.22 trillion in FY14. 

Initiatives prompting rise in Direct Tax to GDP 

• Corporate tax rate has gradually decreased since the Finance Act of 2016. 
• Phasing out of exemptions and incentives for the corporate sector. 
• Vivad se Vishwas Scheme for reducing litigations in the direct tax payments. 
• Finance Act of 2020 allows individual taxpayers to pay income tax at lower slab rates by forgoing specified exemptions. 
• Other reforms: Aadhaar – PAN linkage, digital technology (Faceless Assessment, Faceless Appeal) to improve tax administration, Taxpayers Charter, etc. 

About direct tax 

• In India, the primary direct taxes at the central level are personal and corporate income taxes, governed by the Income Tax Act of 1961. 
• However, India’s tax-to-GDP ratio is comparatively low, ranking much lower than other countries. 
  • For instance, OECD countries typically have an average tax-to-GDP ratio exceeding 30%. 
• The dominance of the informal sector, tax evasion, exemptions and incentives, etc. are key reasons for low ration in India.