Tax-to-GDP Ratio: Strategic economic blueprint to tax proposals 

tax

By Rajiv Chugh 

The Finance Bill of 2025 stands as a landmark in shaping the trajectory of fiscal policy, embodying the government's resolute vision for a tax framework that catalyses growth and ensures equity. At the forefront of this legislative intent is the “tax-to-GDP” ratio, which has grown to an all-time high of 6.64 percent for FY 2023-24, a crucial measure of fiscal health, reflecting the government's prowess in marshalling resources relative to the economic output to underpin public services and development projects.

A robust growth in tax-to-GDP ratio over the years signals a growing tax base and effective tax collection, vital for a sustainable fiscal landscape that doesn't overburden taxpayers.

In a move, characteristic of the government's commitment to fiscal stability, corporate income tax rates for the assessment year 2025-26 have been held constant. This policy choice is instrumental in creating a predictable economic environment that fosters voluntary tax compliance and broadens the tax base. Such fiscal prudence is key to preserving the momentum of the tax-to-GDP ratio, ensuring that tax revenue scales with economic growth.

Key feature of the government's reform agenda is the introduction of a new income tax bill by next week, is expected to modernize the tax code and make it more accessible and user-friendly. This initiative aims to demystify tax laws, thereby minimizing the potential for disputes and litigation. A transparent and streamlined tax code is anticipated to reinforce taxpayer trust and encourage a culture of voluntary compliance, both of which are critical for enhancing tax collection efficiency and, by extension, the tax-to-GDP ratio.

The Bill also seeks to simplify the tax framework, particularly for smaller trusts and institutions, by extending the validity period for their registration and rationalizing the criteria for registration cancellations. These measures are designed to lessen the administrative load and encourage voluntary compliance. On the socio-economic front, the Bill introduces measures to ensure parity in the taxation of capital gains between residents and non-residents, specifically targeting Foreign Institutional Investors. This reform aims to attract foreign investment and stimulate economic growth by offering an equitable tax landscape for all market participants.

The Finance Bill goes further to underscore the value of voluntary compliance. It introduces progressive measures that reward accurate self-reporting and prompt tax settlements. A particularly noteworthy provision is the facility for taxpayers to voluntarily declare material facts and resolve their tax liabilities with interest, avoiding penalties post-clearance of goods. Initiatives like these are expected to foster a collaborative dynamic between taxpayers and the tax administration, optimizing the tax collection process and fortifying the integrity of the tax system.

The suite of direct tax proposals including rationalisation of tax slabs for salaried individuals, embedded within the Finance Bill are harmoniously integrated with the nation's wider economic strategy. Balancing the imperatives of stability and reform, these measures are designed to augment the tax-to-GDP ratio, aligning fiscal policy with the grander scheme of economic growth and resilience. Emphasizing voluntary compliance and tax process simplification are strategic endeavours aimed at widening the tax base and nurturing an environment ripe for economic expansion.

The Finance Bill, with its direct tax proposals and introduction of a new Income Tax bill, constitutes a thoughtful response to the critical need to sustain and grow the tax-to-GDP ratio while cultivating a culture of voluntary compliance. These reforms are poised to reinforce the nation's fiscal structure, rendering it more just and conducive to prolonged economic prosperity. In effect, the government is charting a course for an economy that is resilient and primed for future challenges.

(Rajiv Chugh Partner & National Leader, Policy Advisory & Speciality Services, EY India.)

(Views expressed are his personal and do not represent the stand of this publication.)