Taxation & Revenue Mobilisation: India's tax-to-GDP ratio remains structurally low compared to peer economies." Examine the constraints and suggest measures to broaden the direct tax base.

Question

PocketIAS · Accepted Answer

Introduction:

At around 11–12% (Centre) and ~17–18% (general government), India’s tax-to-GDP ratio lags peers, with a particularly narrow direct tax base.

Body:

Key constraints are structural. A large informal economy limits income reporting and documentation, while low per capita incomes keep many outside the tax net. The workforce is dominated by self-employed and agricultural sectors, where income assessment is difficult and agricultural income remains largely exempt. High thresholds and exemptions reduce the effective taxpayer base, while tax evasion and weak enforcement persist despite digitisation. Additionally, corporate tax collections are moderated by past rate cuts (2019) and profit concentration in a few large firms, limiting broad-based buoyancy.

Broadening the direct tax base requires a multi-pronged approach. First, deepen formalisation through GST integration, digital payments, and e-invoicing to create verifiable income trails. Second, expand data-driven compliance using analytics (AIS, TIS) to detect under-reporting. Third, rationalise exemptions and deductions to simplify the tax regime and widen the base. Fourth, bring more high-income individuals in agriculture and informal sectors under scrutiny without burdening small farmers. Fifth, strengthen tax administration capacity and dispute resolution to improve trust and compliance. Encouraging voluntary compliance through stable policy and lower litigation is equally important.

Conclusion:

Enhancing India’s tax-to-GDP ratio hinges on broadening the direct tax base via formalisation, simplification, and better enforcement—ensuring equitable and sustainable revenue mobilisation for development.

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