The combined ratio of tax to gross domestic product (GDP) of the central and state governments fell to a seven-year low of 14.73 per cent in 2010-11. Experts attributed it to larger expansion in the size of the economy, which is delivering a lower ratio despite a rise in tax proceeds.
Total tax revenue increased 17.5 per cent to Rs 11.6 lakh crore in 2010-11, compared to 7.9 per cent growth a year before. Despite this, the tax to GDP ratio fell, reflecting the combined effect of economic growth and inflation, say economists.
“This signifies the economy is growing at a healthy rate,” said M S Mani, senior director, Deloitte.
While the direct tax to GDP ratio was 5.48 per cent in 2010-11 (budget estimates), a four-year low, the indirect tax to GDP ratio was 9.25 per cent, higher than in 2009-10 when it was 9.15 per cent, according to data released by the finance ministry.
The break-up of the ratio into the Centre’s and states’ numbers reveal th Union Government tax-GDP ratio, after devolution of tax funds to states, was at an eight-year low of 6.8 per cent. Within this category, the direct tax-GDP ratio was 3.76 per cent and the indirect tax-GDP ratio was 3.02 per cent. These figures are not comparable with earlier years, since 2009-10 data is not available with the government. However, if 2009-10 is excluded, the Centre’s net indirect tax-GDP ratio was at a 50-year low.
“The services sector contribute the highest amount to GDP, but a major part of it is unorganised; hence, they do not yield so much tax,” explained Mani.
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On the other hand, the states’ tax-GDP ratio is at a 12-year low of 5.25 per cent. Of this, the direct tax-GDP ratio was just 0.12 per cent during 2010-11, the same as the year before. However, states do not have direct tax as their major source of revenue; the major bit comes from indirect taxes. Their indirect tax-GDP ratio was at a 11-year low of 5.13 per cent.
After states switched to a value added tax (VAT) regime from one based on sales tax from April, 2005, the indirect tax-GDP ratio rose to 5.86 per cent during 2005-06 from 5.69 per cent a year earlier. A year after, the ratio again rose to 5.98 per cent. After that, it has been steadily coming down.
However, if the absolute indirect tax kitty is taken into account, states’ revenues rose 87 per cent after they shifted to VAT. This is a staggering figure, compared to just 4.4 per cent annual in the preceding five years.