ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Tax-to-GDP Ratio

India’s Performance in Comparative Perspective

Tax and gross domestic product data of 168 countries is used to test the validity of the so-called Wagner’s “law.” How does India compare with other countries given its lower per capita income?

The authors acknowledge the support rendered by Kumar Abhinav, Jenny Abraham, and Kaveri Arora

The tax-to-gross domestic product (GDP) ratio is a useful measure of a country’s capacity to generate tax revenues with respect to the size of its economy. This metric gives an estimate of a country’s ability to mobilise resources to fuel its development. The appropriate level of India’s tax-to-GDP ratio is a topic of much debate. Some feel that at 16.7% (2019–20), it is too low. India’s total tax receipts for 2019–20 were `32.31 trillion comprising the union tax revenue of `20.07 trillion and states’ own tax revenue of `12.24 trillion. Of this `32.31 trillion, the direct taxes component was `12.16 trillion while indirect taxes accounted for `20.15 trillion. India’s tax-to-GDP ratio is often compared with that of the Organisation for Economic Co-operation and Development (OECD) countries, which have an average tax-to-GDP ratio of more than 30% with it even going up in excess of 40% in the Nordic countries.

Another concept called the Wagner’s “law,” also known as the law of increasing state activity, suggests that public expenditure increases with rising national income. Wagner’s law of ever-increasing state expenditure was derived from the historical experience of continental Europe, principally Germany, in its early stages of industrialisation. According to many studies, especially relating to developed countries, Wagner’s hypothesis holds true. However, there are studies according to which there exists no long-run relationship between government expenditures and output. If the Wagner’s law holds, it may not be appropriate to compare the tax-to-GDP ratio of India having a per capita income of about $2,000 with that of the OECD countries, which average a per capita income in excess of $50,000, which is 25 times more than that of India.

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Updated On : 6th Jul, 2023
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