To fulfill the dream of 7% GDP growth, the government will have to focus on tax reforms

On Wednesday, the accounting and consulting firm Ernst & Young (EY) emphasized the need for India to increase its tax revenue in proportion to changes in GDP to achieve an economic growth rate of 6.5% to 7.0%. The company stated that maintaining tax buoyancy between 1.2 and 1.5 is crucial for this goal. The report also highlighted the necessity for the government to strengthen revenue collection, particularly by increasing the tax-to-GDP ratio from the estimated 12% in the fiscal year 2025-26 to 14% by the fiscal year 2030-31.

Focus on Increasing Tax Revenue

EY stressed that India’s fiscal strategy should prioritize increasing tax revenue in proportion to GDP changes, ensuring prudent expenditure management, and implementing continuous structural reforms for sustainable growth.

According to EY India’s Chief Policy Advisor, D.K. Srivastava, the fiscal year 2025-26 budget strategically balances fiscal consolidation with the essential requirements for economic growth. Srivastava stated, “However, to achieve a medium-term growth rate of 6.5% to 7.0% and realize the vision of a developed India, it is essential to ensure that tax revenue growth remains within the range of 1.2% to 1.5%. This will help create the necessary fiscal space to accelerate infrastructure expansion, increase social sector spending, and maintain fiscal discipline.”

Declining Tax Revenue Growth

The EY India Economy Watch report pointed out that over the past three years, the growth in gross tax revenue has been gradually declining. In the fiscal year 2023-24, tax buoyancy was at 1.4, but it dropped to 1.15 according to revised estimates for the fiscal year 2024-25. Furthermore, the budget for the fiscal year 2025-26 projects it to be 1.07.

The EY report stated, “Maintaining tax buoyancy within the range of 1.2% to 1.5% will enable the Indian government to achieve a GDP growth rate of 6.5% to 7.0%.” The country’s economic growth rate for the next fiscal year is expected to be between 6.3% and 6.8%. For the current fiscal year, GDP growth is projected to be around 6.4%.

The Importance of Tax Buoyancy

Tax buoyancy refers to the responsiveness of tax revenue to changes in GDP. If tax buoyancy is high, it indicates that tax revenues are increasing at a faster rate than GDP growth, which is a positive sign for the economy. Conversely, a declining tax buoyancy suggests that revenue collection is not keeping pace with economic growth, which can lead to fiscal challenges.

For India, achieving a tax buoyancy of 1.2 to 1.5 means that for every 1% increase in GDP, tax revenue should grow by 1.2% to 1.5%. This is essential for meeting government expenditure needs, particularly in sectors such as infrastructure, healthcare, and education.

Government’s Strategy to Boost Tax Revenue

To achieve higher tax revenue growth, the government needs to focus on several key strategies:

1. Expanding the Tax Base: The government should work towards bringing more individuals and businesses into the tax net. This can be achieved through better compliance mechanisms and stricter enforcement of tax laws.
2. Enhancing GST Collections: The Goods and Services Tax (GST) is a major source of revenue for the government. Ensuring efficient GST collection and minimizing tax evasion can significantly boost revenue.
3. Reducing Tax Evasion: Strengthening tax administration, implementing digital tax tracking, and increasing transparency in financial transactions can help curb tax evasion.
4. Reforming Direct and Indirect Taxes: Streamlining income tax structures, reducing exemptions, and rationalizing tax rates can make tax collection more effective and equitable.
5. Encouraging Economic Formalization: Many businesses in India operate in the informal sector, leading to revenue losses. Encouraging formalization through incentives and regulatory reforms can help increase tax collections.

Challenges in Increasing Tax Revenue

While increasing tax revenue is a priority, there are several challenges that the government needs to address:

• Economic Slowdown: A slower economic growth rate can directly impact tax collections. If businesses and individuals earn less, they pay less in taxes.
• Taxpayer Resistance: Frequent changes in tax laws and high tax rates may discourage compliance. The government needs to balance taxation with incentives for businesses and individuals.
• Administrative Bottlenecks: Inefficiencies in tax collection mechanisms, delays in refunds, and bureaucratic hurdles can discourage taxpayers from adhering to tax regulations.
• Global Economic Factors: External factors such as inflation, trade disruptions, and geopolitical tensions can impact India’s economic growth and, consequently, tax revenue.

The Role of Fiscal Policies in Economic Growth

A strong fiscal policy is essential for sustaining economic growth. Increasing tax revenue allows the government to invest in key sectors, create jobs, and improve public services. Key areas where tax revenue plays a crucial role include:

• Infrastructure Development: Higher tax collections can help fund roads, railways, and urban development projects, which are essential for economic progress.
• Social Welfare Programs: Government initiatives for poverty alleviation, education, and healthcare require substantial financial resources.
• Debt Management: Increased revenue can help reduce fiscal deficits and manage national debt more effectively.
• Boosting Investor Confidence: A stable and predictable tax system encourages foreign direct investment (FDI) and strengthens investor confidence in the Indian economy.

The EY report underscores the importance of strengthening India’s tax revenue system to ensure sustained economic growth. By maintaining tax buoyancy in the range of 1.2% to 1.5%, the government can create fiscal space for infrastructure development, social sector spending, and overall economic expansion.

To achieve this, a multi-faceted approach that includes expanding the tax base, improving GST collections, reducing tax evasion, and implementing structural tax reforms is necessary. However, challenges such as economic slowdowns, taxpayer resistance, and administrative inefficiencies must also be addressed.