India has achieved a significant milestone in fiscal performance, with its tax-to-GDP ratio climbing to 19.6 percent, outpacing emerging market peers like Hong Kong, Malaysia, and Indonesia. This revelation comes from a comprehensive analysis by Bank of Baroda, highlighting the nation’s improving tax efficiency and collection mechanisms.
The ratio encompasses tax revenues from both central and state governments, reflecting a robust system-wide enhancement in compliance and administration. While the central government’s gross tax revenue stands at 11.7 percent of GDP, the combined figure underscores the vital role states play in bolstering overall collections.
Experts note that this upward trajectory signals deeper economic formalization and better enforcement. However, India still trails developed economies such as Germany at 38 percent and the United States at 25.6 percent. This gap, particularly against the backdrop of India’s favorable demographics, presents a golden policy opportunity to further elevate revenues.
Government initiatives focusing on tax simplification, rationalization, and digitization are gaining momentum. Key reforms, including the rollout of the new Income Tax Act in 2025 and streamlined corporate tax structures, promise greater transparency and ease of compliance.
Set to take effect from April 1, 2026, the updated Income Tax Act is poised to integrate more of the informal economy into the formal fold, thereby expanding the tax base. Historical data reveals a tightening correlation between tax collections and nominal GDP growth over time.
Income tax receipts show strong ties to rising per capita income and improved adherence, while corporate taxes benefit from healthier corporate profits. These trends, compared to past patterns, indicate sustained strength in revenue streams, setting the stage for sustained fiscal health in the years ahead.