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Data released by the CBDT recently revealed that direct tax to GDP ratio of the country has improved considerably to 6.11 per cent in FY23; the highest since 2007-08. A businessline analysis, of the top 15 States and Union Territories, revealed a large variance in this ratio. While Delhi topped the list, Bihar, Madhya Pradesh and Uttar Pradesh had the lowest direct tax to GDP ratios.
The direct tax to GDP ratio is significant because in direct taxes, the taxpayer (individuals, companies, partnerships, and so on) must file the returns and pay the tax; or the employer should deduct TDS and submit to the government. This is unlike indirect taxes which are automatically collected when we consume goods or services. Therefore, in a way, direct tax to GDP ratio can help us understand the level of tax compliance in a region.
How States fared
Delhi had the highest direct tax to GDP ratio in FY23 at 21.22 per cent. Next on the toppers’ list were Maharashtra with 16.6 per cent and Karnataka at 9.29 per cent. High income level of the residents appears to be one reason for high direct tax payments in these regions. Delhi enjoys the highest GDP per capita among the 15 largest states. Residents of Karnataka too enjoy high income levels. Maharashtra has a fairly large share of the top Indian companies.
On the other hand, States with lower GDP per capita ended at the bottom of the list. These include Bihar with direct tax to GDP ratio of 0.91 per cent, Uttar Pradesh with 1.68 per cent, Madhya Pradesh at 1.47 per cent and Rajasthan at 2.17 per cent.
Agriculture the differentiator
While income levels of the residents could be one reason for the variance, dominance of the agriculture sector in the economy is also playing a part in subduing direct tax collections.
This is because income from agriculture in exempt from income tax. States such as Madhya Pradesh, with 42.6 per cent of its GVA coming from agriculture and allied sector in 2022-23 and Andhra Pradesh with 35 per cent from agriculture could therefore be getting lower direct tax collections. Same holds true for other states such as Bihar and Uttar Pradesh which have a relatively larger share of their GVA coming from agriculture.
Some states such as Telangana (tax to GDP ratio of 2.70 per cent), Tamil Nadu (4.5 per cent) and Haryana (4.59 per cent) had ratios below national average despite high per capita income and lower proportion of agriculture in their GVAs. Large scale tax evasion and lower tax compliance could be compressing the direct tax to GDP ratios in these states.
Total tax to GDP ratio
With direct taxes contributing approximately 54 per cent of the total tax revenue in 2022-23, we can extrapolate the 6.11 per cent ratio to arrive at tax to GDP ratio for India at 11.1 per cent. While this is on par with many emerging economies, it is much below the 15 per cent level recommended by World Bank research and far below the ratios above 20 per cent recorded by developed economies.
(With inputs from Jayant Pankaj)
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