“India’s low tax-to-GDP ratio reflects structural features of its economy as much as administrative weakness.” Examine.

India's tax to GDP ratio, including Centre and states, has historically hovered around 18%, against an OECD average of about 34%. The reasons fall into two groups, deep structural features of the economy and weaknesses in tax administration, and the proposition that both matter is broadly correct.

Structural features that cap the ratio

• Large informal sector: Around 80 to 85% of the workforce is in informal employment, largely outside the formal tax net, which results in a massive tax base erosion.
• Low per capita income: India is a lower middle income country with per capita income around 2,600 dollars, and a large population lives near subsistence, limiting the capacity to pay direct taxes.
• Exemption of agricultural income: Under the Constitution the power to tax agricultural income rests with state governments, and most states have exempted such income from taxation.
• Cash dominated economy: A high level of cash use facilitates under reporting of transactions, and despite the digital push currency in circulation remains high at around 14% of GDP.

Administrative and policy weaknesses

• Inefficient collection and evasion: Persistent administrative gaps, complex compliance procedures and a high volume of pending tax disputes lead to significant revenue leakage.
• Over reliance on indirect taxes: Around 45% of central tax revenue comes from indirect taxes, which are regressive and do not adequately tap the affluent, so the system taxes consumption more than income.

Measures Required

• Formalisation of the economy through digitalisation and GST.

Broaden the direct tax base while improving voluntary compliance.

Strengthen technology-driven tax administration using data analytics and AI.

Simplify tax laws to improve ease of compliance.

India's low tax-to-GDP ratio is the outcome of both structural characteristics of the economy and administrative inefficiencies. While improving tax administration is essential, sustained increases in tax revenue will ultimately depend on higher formalisation, rising incomes and sustained economic growth.