In about thirty years since 1990-91, the total tax collection of central and state governments has not seen any significant change (Figure 1).  Total tax collection had increased from 15.2% of GDP in 1990-91 to 17.9% of GDP in 2007-08.     Since then, it has ranged between 15.5%-17.5% of GDP.  The 15^th Finance Commission had observed that India’s tax collection remains below the estimated tax capacity. 1   In comparison, in other developing economies, tax revenue as a percentage of GDP has been rising. [1]   The Economic Survey (2015-16) had estimated that after accounting for both level of economic development and type of political system, India’s overall tax-to-GDP ratio (centre and states together) is lower by about 5.5% of GDP than that of comparable countries. [2]   Government expenditure was estimated to be lower by about 6% of GDP. 2   Gross tax revenue collected by the central government is estimated to be 11.1% of GDP in 2023-24.  Net tax revenue is estimated at 7.7% of GDP in 2023-24.  It is the amount left with the centre after the devolution of funds to states as per the Finance Commission recommendations.

Figure  1 : Tax collection in India as % of GDP

 Note: Figures for 2021-22 and 2022-23 as per revised and budget estimates, respectively.
 Sources: RBI, MoSPI, Union Budget Documents; PRS.

Tax revenue of the central government is classified as direct taxes (on income, profits, and assets) and indirect taxes (on transaction of goods and services).  Major direct taxes are corporation tax and income tax.  The central government’s policy for direct taxes is to broaden and deepen the tax base while gradually phasing out exemptions. [3]   In recent years, there has been a decline in the contribution of corporate tax to gross tax revenue, as the tax rates were rationalised to attract investment and support economic growth. ³   Revenue from income tax has seen an increase during this period.  While there has been an increase in the number of tax returns filed, the tax base itself is very narrow.  For the assessment year 2018-19, 5.87 crore returns were filed (4.4% of total population). ³   Among these, 40% of the returns were in the nil tax bracket while 53% of the returns were in the tax bracket below Rs 1.5 lakh. ³

Figure  2 : Major direct taxes as % of GDP
 

Note: Figures for 2022-23 and 2023-24 as per revised and budget estimates, respectively.
 Sources: RBI, MoSPI, Union Budget Documents; PRS.

About 45% of the gross tax revenue accrues from indirect taxes.  With the introduction of GST, several indirect taxes were subsumed under the new regime.  In 2016-17, the revenue from taxes subsumed under GST was about 6.7% of GDP.     Revenue collected under GST has been lower than this level so far.

Reasons for lower GST revenue level include: (i) a decline in the effective tax rate (from 14.4% in 2017 to 11.6% in 2019), as compared to the revenue-neutral rate for GST which was recommended to be 15%-15.5%, (ii) economic slowdown between 2018-19 and 2020-21, and (iii) inverted duty structure (higher tax on inputs than finished products), leading to large refunds through input tax credit and less than expected net tax collections for the government. ^{3 , [4] , [5]}

The 15^th Finance Commission has estimated the potential for a GST-to-GDP ratio of 7% over the medium term (net of revenue from compensation cess). 3   The revenue buoyancy in indirect taxes other than GST was driven by an increase in excise duties 

Figure  3 : Tax to GDP ratio under the GST regime

 
 Note: Comprises the collection of both the centre and states.  Tax-to-GDP for 2016-17 does not include Arunachal Pradesh, Gujarat, and Haryana due to the unavailability of data.  The chart excludes 2017-18 as GST was introduced for part of the year.  2021-22 figures based on provisional actuals.
 Sources: GST Network; Union Budget Documents; MoSPI; PRS.

and cesses and surcharges on petroleum products. 3   While the levy of cesses and surcharges has helped maintain the revenue level for the central government, it has led to a lower devolution to state governments.

Disinvestment is the dominant source of capital receipts for the central government.     It involves mobilising revenue through the sale of government’s shareholding in public sector enterprises.     As per budget estimates of 2023-24, 61% of capital receipts is expected to be earned through disinvestment.     The central government has consistently fallen short of achieving the target for disinvestment.  Since 2011-12, the disinvestment target was achieved only in two years – in 2017-18 and 2018-19.  In February 2021, the central government released the new public sector enterprises policy. [6]   The policy envisages maintaining a bare minimum presence of public sector enterprises in strategic areas with complete privatisation and closure of enterprises in non-strategic areas. ⁶   This may adversely impact the non-tax revenue, about 30-40% of which comes from dividends and profits of public sector enterprises.

Figure  4 : Budgeted vs Actual disinvestment receipts (Rs crore)
 Note: For 2022-23, revised estimate taken as actual figures.
 Source: Union Budget Documents; PRS.

Figure  5 : Committed Expenditure as % of Revenue Receipts

Note: Figures for 2022-23 and 2023-24 as per revised and budget estimates, respectively.  
 Sources: RBI, Union Budget Documents; PRS.

Continued reliance on borrowings for financing recurring expenditure

The central government has continued to incur a substantial revenue deficit over the last few years.  Revenue deficit implies that borrowings are needed to finance expenditure which do not lead to the creation of assets or reduction of liabilities.  Since 2008-09, revenue deficit has been above 2% of GDP.  Revenue deficit had decreased to 2.1% of GDP in 2016-17.     In 2023-24, it is expected to be significantly higher, at 2.9% of GDP.  A higher revenue deficit in 2023-24 as compared to 2016-17 can be attributed to: (i) a lower revenue receipts (by about 0.2% of GDP), (ii) an increase in interest payment obligations (by about 0.5% of GDP), and (iii) increase in expenditure under central sector and centrally sponsored and schemes such as PM-KISAN and Jal Jeevan Mission (by about 0.5% of GDP).  Subsidies in 2023-24 are estimated to be 1.3% of GDP, lower than 2016-17 (1.5% of GDP).  A consistently high revenue deficit has constrained capital expenditure by the central government.  Capital expenditure had ranged between

Figure  6 : Revenue Deficit and Fiscal Deficit as % of GDP
 

Note: Figures for 2022-23 and 2023-24 as per revised and budget estimates, respectively.
 Sources: RBI, MoSPI, Union Budget Documents; PRS.

1.5%-2% of GDP between 2008-09 and 2019-20.  Capital expenditure could increase to 2.2% of GDP in 2020-21 and further to 3.3% of GDP in 2023-24, on back of a significantly higher fiscal deficit.

Rise in debt level, more than 40% of revenue receipts to go towards interest payments

The Fiscal Responsibility and Budget Management Act, 2003 was passed by Parliament to place certain limits on debt and deficit. [12]   In 2018, this Act was amended to set the debt ceiling for India at 60% of GDP (to be achieved by 2024-25). 12   Of this, the limit for the central government was set at 40% of GDP. 12   The dependence on borrowings to fund government expenditure has increased in recent years. ³   This was due to the economic slowdown followed by the onset of the COVID-19 pandemic.  There has been a steep rise in general government debt (centre and states) from about 70% of GDP at the end of 2018-19 to about 85% of GDP at the end of 2022-23. 3   The debt of the central government is estimated to rise from 49% of GDP at the end of 2017-18 to 58% of GDP at the end of 2022-23.  High debt levels over the years have required the central government to set aside a significant portion of its revenue receipts towards interest payments.

Implementation of the FRBM Act

The FRBM Act, passed in 2003, sought to set the following targets: (i) elimination of revenue deficit, (ii) maintaining fiscal deficit level at 3%, and (iii) gradual reduction in liabilities. 12   Since its inception, the Act has been amended several times.  In 2012, the Act was amended to remove the target of eliminating revenue deficit and instead require the elimination of effective revenue deficit (revenue deficit after adjusting for grants for the creation of capital assets).  In 2018, the Act was amended to remove the targeting of effective revenue deficit and require the central government to ‘endeavour’ to keep its debt below 40% of GDP.  Amendments from time to time have also postponed the deadlines for achieving various targets.  The implementation of the Act has been put on hold altogether at times.  The first instance was in the backdrop of the Global Financial Crisis in 2008-09. [13]   The second instance was following the COVID-19 pandemic in 2020-21.  The 15^th Finance Commission observed that the Act needs a major restructuring, given the challenges both in relation to debt and fiscal deficit.  It recommended forming a high-powered inter-governmental group to: (i) review the Act, and (ii) recommend a new FRBM framework for the centre as well as states, and oversee its implementation. 3

In 2023-24, interest payment is budgeted at 41% of revenue receipts.  While the fiscal deficit is estimated at 5.9% of GDP in 2023-24, interest payment alone is estimated to be 3.6% of GDP.  The borrowings levels in the next 2-3 years are expected to remain high, with the fiscal deficit targeted to be brought back from 6.4% of GDP in 2022-23 to 4.5% of GDP in 2025-26. [14]

 Figure  7 : Outstanding Liabilities as % of GDP

Note: External liabilities are taken at the current exchange rate.  Figures for 2021-22 and 2022-23 as per revised and budget estimates, respectively. 2022-23 GDP as per first advanced estimate.
 Sources: RBI, MoSPI, Union Budget Documents; PRS.

Figure  8 : Interest Payment as % of Revenue Receipts

Note: Figures for 2022-23 and 2023-24 as per revised and budget estimates, respectively.
 Sources: RBI, MoSPI, Union Budget Documents; PRS.