One of the primary motives of the demonetization initiative was to punish tax-dodging and bring a greater part of the Indian economy into the formal fold and subject it to taxation. As India continues to grow rapidly, it needs to invest in infrastructure, public institutions, and programs. Tax revenues are becoming increasingly important to fund these initiatives. This week let's explore how the country has fared over the years with regards to tax collection.
India's tax revenues to GDP ratio has almost tripled to 17% in 2015-16 (Best Estimate from the Foreign Ministry). In the last 10 years, when the economy has been doing well, the tax revenues as a % of GDP have trended upwards, except for the global recession years of 2008 through 2010. This is good news for a country that has consistently run a fiscal deficit for a long time. That this figure is rising, also means that tax revenues are growing faster than the economy. This means the government is succeeding in widening the tax base. Although the government has not been very transparent in sharing the net impact on the economy of the demonetization initiative, it will certainly discourage tax-dodging at least in the short term. The passage of the GST bill, which simplifies taxation, will further widen the tax base.
It is interesting to note however that the World Bank, which vastly under-reports India's tax revenue share of the GDP at 11%. If you are interested to know how other countries compare: it pegs China's share at 9.7%, the United States' at also 11% and that of rich Western European nations in the mid-twenties.