Compare the share of direct and indirect taxes in total tax collection and tax-GDP ratio in India? Do you see an imbalance in these shares as compared to other countries? What can be implications of such imbalance and what should be done?

July 23, 2022 February 21, 2024

In a developing nation like India government have to play a proactive role in the economic growth and development. Tax collection, therefore it is very important as it is a financial source of welfare initiative by the government.
Out of total tax collected in India, almost 2/3 come from indirect tax collection while direct contribute only 1/3. The low base of direct tax and high proportion of indirect tax is not good for economic growth & equality as the direct tax is progressive in nature while indirect taxes kind of regressive as rich and poor will have to pay indirect tax.
In fact, the narrow tax base is one of the major reasons behind poor tax to GDP
ratio. Tax to GDP ratio in India is around 18% which is very less when compared with developed Nations(30-40%) as well as with the comparable economies like Mexico, Brazil, South Africa(23-25%)
Implications of such imbalance
1.Resources mobilization:
Due to narrow tax base government do not have adequate financial sources to mobilize resources.
2.increased inequality in the society
More Reliance on indirect tax widens the inequality due to which rich becomes richer and poor become poorer.
3.Social welfare
Due to Limited financial capabilities, the spending on major sector like Education, health, skill development is very limited.
4.Regional development
There is a direct correlation in poor tax collection from a state and poor infrastructure. Industries are not willing to invest in the states with poor
Industries are not willing to invest in the states with poor infrastructure, therefore there is scarcity of jobs leading to narrow tax base.
What should be done rectify such imbalance
following steps can be taken to improve tax base as well as tax collection
1.widen tax base & minimize tax exemptions
2.Ensure compliance using technology & policy initiatives. For example GST can play an important role in the better convergence of direct and indirect tax department and creation of electronic trails, so tax evasion will be very difficult.
3.Subsidy rationalization
4.Clear spending priorities
5.Property tax is underutilized steps should be taken to utilize it.
6.Emphasis on behavioral change. Tax Psychology in India is of avoidance rather than of compliance different behavioral model which promote tax compliance should be used.
Both direct and indirect taxes are essential for revenue generation, however, the scope of direct tax is very limited in case of developing nation. Therefore they should be a combination of box direct and indirect taxes for revenue mobilization.