India's Tax Reforms: Bridging Gaps and Leading Emerging Markets

India's tax-to-GDP ratio stands at 19.6%, on par with several global economies yet behind advanced nations like Germany and the US. A Bank of Baroda report highlights potential through demographic advantages and outlines reforms that are set to streamline compliance and improve transparency, driving future growth.

India's tax-to-GDP ratio, when combining central and state contributions, reaches 19.6%, aligning it with several prominent global economies. While central gross tax revenue stands at a lower 11.7%, the broader figure surpasses emerging markets like Hong Kong, Malaysia, and Indonesia. However, it trails behind advanced countries such as Germany, boasting a 38% ratio, and the United States at 25.6%.

The Bank of Baroda's report emphasizes this disparity as a major policy opportunity, given India's demographic advantages. It mentions intensified efforts towards comprehensive tax reforms aimed at simplification, rationalization, and digitization, projecting improvements in the tax-to-GDP ratio soon. Landmark regulatory reforms, including the much-anticipated Income Tax Act 2025 and corporate tax rationalization, are set to enhance transparency and compliance ease.

Historical data illustrate increasing synchronization between tax collections and nominal GDP. Post volatility from FY93 to FY02 due to a limited tax base, there's been noticeable alignment, particularly from FY14 onward, with marked convergence from FY23. This is supported by current tax elasticity at 1.1, surpassing historical averages.

The report draws a strong positive correlation between tax revenues and macroeconomic indicators. Income tax displays high correlation with nominal GDP and per capita income. It suggests, 'improving financial health of corporations boosts corporate tax collection,' evidenced by buoyant levels exceeding long-term norms.

Statistical validation via the Granger Causality test confirms mutual influence between tax and GDP. Despite this, the report highlights that long-term integration isn't significant, underlining that revenue growth is largely dependent on structural reforms over mere economic expansion. The Income Tax Act 2025, anticipated for implementation on April 1, 2026, aims to enhance collection by targeting the informal sector and increasing efficiency.

(With inputs from agencies.)