What Is Tax Buoyancy ? | Why Tax-GDP Ratio(India) Is Low ?

Tax Buoyancy refers to the responsiveness of tax revenue growth to changes in GDP. When the economy grows and incomes rise, tax revenues should ideally increase. If the tax system is buoyant, tax revenues will increase more than proportionately with a rise in GDP. This means that if GDP grows by 10%, and tax revenues grow by more than 10%, the tax system is said to be buoyant.

The Tax-GDP ratio is a measure of the tax revenues collected by the government as a percentage of the GDP. It indicates the share of the country's output that the government claims through taxes.

The Tax-GDP ratio in India is low due to several reasons:

1. Large Informal Economy: A significant part of India's economy is informal or unorganized, where transactions are in cash and not always reported for tax purposes. This reduces the tax base and hence the tax-GDP ratio.

2. Tax Evasion and Avoidance: Tax evasion and avoidance are quite prevalent in India. Many individuals and businesses do not declare their full income or overstate deductions to reduce their tax liability.

3. Exemptions and Deductions: The Indian tax system provides various exemptions and deductions, which reduce the effective tax rate and hence the tax-GDP ratio.

4. Agriculture Income: Agriculture income is not taxed in India. Given that a significant portion of the population is engaged in agriculture, this reduces the tax-GDP ratio.

5. Low Compliance: Tax compliance in India is relatively low, which means many people who should be paying taxes are not, further lowering the tax-GDP ratio.

To increase the tax-GDP ratio, the government needs to broaden the tax base, improve tax compliance, reduce tax evasion and avoidance, and rationalize exemptions and deductions.