The tax-to-GDP ratio is a ratio of a nation's tax revenue relative to its gross domestic product (GDP). The Hindu rate of growth is a term referring to the low annual growth rate of the planned economy of India before the liberalisations of 1991.
The trend of both the parameters of economy are not in sync for India since the early years after independence.

• In the 25-year period from 1965 to 1990, India’s tax-to-GDP increased steadily from 10% to 16% while GDP increased 2.8-fold.
• In the subsequent 25-year period from 1991 to 2014, India’s tax-to-GDP stayed roughly constant between 16% and 17% while GDP increased 4.5-fold.
  Thus India broke away from its clichéd Hindu rate of growth post the 1991 economic reforms to grow much more rapidly, its tax-to-GDP ratio stayed nearly constant.

Ineffectiveness of government’s efforts to increase the ratio:

• Tax exemptions and subsidies: The exemptions in the taxable income have grown at a much faster rate than the income. As a result, there is less tax buoyancy. Similarly tax expenditure in the form of tax subsidies and exemptions was more than 6 lakh crore in 2015-16.
• Loopholes in double tax avoidance treaties: Provisions for tax exemptions from short term capital gains are often misused by companies to re-route their investments from such countries (called round tripping of funds). Similarly issues related to tax-evasion, double non-taxation and transfer pricing need to be fixed.
• Complexity of tax laws: Multiplicity of taxes since independence, poor compliance, glaring loopholes. eg. GAAR law.
• Failure to improve the socio-economic conditions of citizens: Failure of the successive governments to address the issues of high poverty (22% of population), illiteracy, low per capita income, health, gender parity etc.
• Faulty tax policy: As per Moody’s, the service taxes constitute merely 5 percent of total general government revenues, although they comprise about 60 percent of GDP.

Structural Issues with tax regime are also the culprit:

• Small tax base: Since majority of population don't earn enough to be in taxable income bracket, only about 3% population pays tax. According to Shome Panel, in the last 10 years though the direct tax collection has increased by more than 700%, the number of tax payers has merely grown by 35%.
• Large Informal Economy: With 91% of economy is informal, they are left out of the tax net due to various exemptions and compliance issues.
• Parallel economy: A parallel economy of unaccounted incomes and expenditures exists in India which goes untaxed.
• Low per capita income: Low average incomes and a high poverty rate result in a very small portion of the labor force being eligible to pay personnel income tax.
• Tax compliance: The sector on which 52% of population is dependent, goes untaxed.
• Tax litigations: As Economic survey 2017-18 has pointed out, India has one of highest number of disputes between tax administration and taxpayers, with lowest proportion of recovery of tax arrears. For example: the Vodafone tax dispute involving RS 20K crore lingering since 2008.
• Unhealthy direct to indirect tax ratio: For India, the ratio stands around 35:65 which is unlike the OECD countries where the ratio is around 67:33.

The implications of tax to GDP ratio is very detrimental to the economy. It lowers the GDP, creates high fiscal deficit, impedes the socio-economic policies, induces inequality etc. Being an aspirational superpower, the need of the hour for India is to improve the tax to GDP ratio.

Way Forward:

• Focus on widening tax base rather than deepening it. The suggestion of economic survey to tax the farming sector can be considered.
• Simplification of direct tax laws as suggested by Justice Easwar committee must be looked into.
• Strengthening of GST coupled with robust IT infrastructure (ex. Project SAKSHAM, Project INSIGHT) will bring transparency and accountability in tax payment and collection.
• Efficient targeting of subsidies and phasing out of tax exemptions.

Nobel-winning economist Joseph Stiglitz summarizes that optimal tax system would be “progressive income taxes, complemented by indirect taxation, property taxes and capital taxes that enhance the progressivity that can be achieved by the tax system while limiting the level of distortion. India must work towards achieving this ideal.