India’s tax system is under review as the government considers easing the individual tax burden. In 2023-24, income tax collections hit a record 3.35% of GDP, surpassing corporate taxes at 3.12%, boosted by a 2019 rate cut to encourage investment. Despite limited revenues, taxation aids redistribution in a highly unequal society. India’s tax-to-GDP ratio of 17.1% aligns with lower-middle-income countries. Improved public services and stable tax brackets could enhance compliance and strengthen trust among taxpayers, fostering economic balance and growth.
India’s tax system is gaining attention as the government reportedly considers measures to reduce the tax burden on individuals in the upcoming Budget. A cross-country analysis indicates that India’s taxes are not excessively high compared to its global peers. For the financial year 2023-24, income tax collections reached historic highs, equivalent to 3.35% of the country’s gross domestic product (GDP). These taxes, largely contributed by individuals, outpaced corporation tax collections, which stood at 3.12% of GDP. The latter has benefited from a 2019 policy aimed at lowering corporate tax rates to boost investment.
The prospect of easing personal taxes is significant, given India’s relatively low government revenues and constrained public spending. In a country marked by considerable inequality, taxation plays an important role in redistribution and economic balance. Advocates for individual tax relief point out that such measures could provide much-needed support to taxpayers while maintaining fiscal responsibility.
A Business Standard analysis shows that India’s tax-to-GDP ratio of 17.1% is comparable to the median of lower-middle-income countries, which is 16.7%. However, more developed nations, such as high-income and upper-middle-income countries, report slightly higher median tax-to-GDP ratios of 18% to 20%. These countries typically benefit from stronger tax collection systems and higher incomes among their citizens, enabling them to generate more revenue.
The 2015-16 Economic Survey highlighted the importance of focusing on improved delivery of basic public services rather than direct redistribution. It warned of the risk of a "Hirschman exit," where the middle class might disengage from domestic markets if they feel underserved. The survey recommended keeping tax brackets stable while gradually expanding the taxable population. This approach, coupled with better public services, could help taxpayers feel their contributions are worthwhile.
Encouraging trends are already emerging, as data shows an increase in tax returns filed by individuals earning over ₹5 lakh annually. As noted, “Improved government delivery, meanwhile, could help the middle-class feel it is getting its money’s worth.” These developments reflect a growing alignment between tax compliance and public trust, paving the way for a more equitable and prosperous future.
Charts from Statsguru
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