Tax-to-GDP: What India can learn from countries with better collections

Exploring India's tax-to-GDP gap, lessons from global reforms, and the role of social security contributions in boosting revenue and citizen compliance

Discussions on the tax-to-GDP ratios for India have often cited the country’s performance in comparison to other nations. The underlying analysis refers to simple comparisons to other similar countries or to statistical tools like the stochastic frontier analysis. The South Asia Development Update, 2025, of the World Bank, too, uses this approach. The tax gap from this method indicates the shortfall in revenue collection relative to a potential. The broad conclusions in the latter suggest that the tax gap for India is similar to that of Emerging Markets and Developing Economies. This approach assumes that tax collections depend primarily on the structural features of the economies. 

An alternative way of examining this question is to identify countries that have reported a significant increase in the tax-to-GDP (gross domestic product) ratio over a given period and to examine the drivers behind such improvements in revenue performance. Using information from the Organisation for Economic Co-operation and Development (OECD) database on global revenues, an attempt was made to identify countries that reported a significant increase in the tax-to-GDP ratio between 2000 and 2022. Excluding small island nations and oil-rich countries, the table provides a snapshot of some countries that reported an increase in the tax-to-GDP ratio of over 9 per cent. These include some low-middle-income countries, some upper-middle-income countries, and some high-income countries. Clearly, the need to raise tax revenue mobilisation is a concern shared by many nations. 

It might be interesting to study how these countries succeeded in raising and maintaining a higher tax-to-GDP ratio. Each of these countries has implemented various tax reform measures to expand the tax base and improve revenue collection. Some of these countries reported consistent increase over the entire period — Nicaragua is a good example. Others attained a higher level around the time of the global financial crisis and maintained it thereafter - Georgia, Morocco, and Kyrgyzstan fall in this category. On the other hand, Japan and Tunisia experienced growth during and after the global financial crisis, followed by Korea from 2015. The drivers of growth in tax collections appear to differ across countries, as reflected in the differences in the taxes contributing to that growth. 

The table also provides information on the sources of increase in the ratio. The focus is on four major groups of revenues — corporate tax, personal income tax, goods and services taxes, and social security contributions (reported as social contributions in the table). An interesting thing to note is that, of the eight countries presented in the table, six report an increase in social security contributions. The second most common contributor to the increase is taxes on goods and services, which include value-added tax (VAT), as well as customs duties and excises. 

Some questions arise regarding the role of social security contributions. These contributions, often paid partly by the employer and partly by the employee, are similar to the provident fund contributions for formal sector employees in India. In India’s tax system, such contributions are not included in tax collections. An easy way to improve the optics of the tax-to-GDP ratio could be to include these contributions in the tax collection framework, which would also expand the government’s liabilities. In other words, it would affect optics alone, with no impact on resources available to governments. 

A conceptual question however remains: Can the existence of a government-guaranteed social security system create a better relation between the state and its citizens? Popular perceptions among middle-class taxpayers suggest that people are uncomfortable with the expenditure priorities of the government. A survey by Vidhi Legal on the impact and incidence of tax evasion in India explores perceptions regarding government expenditures and reports that less than half the people believe that tax money has been put to good use. Establishing a closer link between taxes and perceived benefits might encourage better compliance. 

 

The author is director, National Institute of Public Finance and Policy, New Delhi. The views are personal