Direct Tax to GDP Ratio

(Probable Question: Discuss the steps taken by the government to increase the direct tax to GDP ratio which has been rather stagnant from 2008-09 onwards.)

The direct tax (corporate tax and personal income tax) to GDP ratio has been rather stagnant from 2008-09 onwards, ranging between 5.4% and 5.7%. This is in contrast to the rapid increase in the direct tax to GDP ratio during the preceding years.

The major policy reforms to increase the direct tax-to-GDP ratio would encompass increasing the tax base and curbing black money. In order to increase the tax base, various reform measures including demonetization and the effective application of the JAM (Jandhan-Aadhaar-Mobile) trinity have had a durable impact on the direct tax revenues.

In addition, the government has taken a number of steps to curb black money generation such as:

  • Mandatory disclosure of foreign assets.
  • Benami Property Amendment Act, 2016
  • Amendments in Double Taxation Avoidance Agreements signed with Mauritius, Singapore and Cyprus
  • A major drive to replace cash transactions by digital transactions.
  • Rationalisation and simplification of tax structure under the Goods and Services Tax regime.

The cumulative result of these measures would be increased the tax compliance and an expansion in the tax base. Going forward, this will lead to an increase in the direct tax-to-GDP ratio.

Source: NITI AAYOG Three Year Action Agenda, 2017-18 to 2019-20.