New Delhi: India needs to maintain a tax buoyancy of 1.2-1.5 to achieve a sustainable economic growth rate of 6.5-7% in the coming years, according to a report by Ernst & Young (EY). The Indian economy is projected to grow between 6.3% and 6.8% in the next fiscal year, but achieving higher and stable growth will require improved tax revenue collection and structural reforms, the report highlights.
What is Tax Buoyancy and Why Does It Matter?
Tax buoyancy is an essential indicator that measures how efficiently tax revenues grow in relation to the economy. A buoyancy ratio above 1 means that tax revenue is increasing at a higher rate than GDP, suggesting effective tax collection and compliance. EY’s analysis indicates that India must maintain a tax buoyancy between 1.2 and 1.5, meaning for every 1% increase in GDP, tax revenues should rise by 1.2% to 1.5%.
India’s Economic Outlook and Revenue Challenges
India’s economy has been showing resilience, with the Reserve Bank of India (RBI) forecasting a 6.7% growth rate for FY 2025-26. The government’s own projections fall within the 6.3% to 6.8% range. However, despite strong economic fundamentals, tax revenue growth has not kept pace, with gross tax revenue buoyancy declining from 1.4 in FY 2024 to an estimated 1.07 in FY 2026.
The EY report suggests that India needs to increase its tax-to-GDP ratio from the current 12% to 14% by FY 2031. This increase is crucial for funding infrastructure projects, expanding social welfare programs, and maintaining fiscal stability.
Key Factors Impacting India’s Tax Buoyancy
1. Declining Revenue Growth
While India has seen strong GDP growth, the decline in tax buoyancy suggests a slowdown in revenue collection efficiency. This trend raises concerns about the government’s ability to sustain fiscal expenditure without increasing borrowing.
2. Informal Economy and Tax Evasion
A significant portion of India’s economy operates in the informal sector, which limits tax collection. Expanding the tax base by formalizing more businesses and enhancing compliance is critical.
3. GST Collections and Direct Tax Reforms
GST collections have remained strong, crossing ₹1.5 lakh crore consistently in recent months. However, streamlining tax compliance and reducing evasion in the GST framework will be essential for improving overall tax buoyancy.
4. Policy and Structural Reforms
The government has introduced several tax reforms in recent years, including corporate tax rate reductions and simplifications in the direct tax regime. More such measures, combined with digital tax administration, can enhance revenue efficiency.
Government’s Fiscal Strategy and Future Outlook
To achieve a higher tax buoyancy, India needs to focus on:
- Expanding the Tax Base: Bringing more businesses and individuals into the formal tax net.
- Improving Compliance Mechanisms: Strengthening enforcement through digital tools and AI-driven audits.
- Boosting Economic Growth: Higher GDP growth naturally leads to higher tax revenue, provided the tax collection mechanisms remain efficient.
- Enhancing GST Implementation: Simplifying tax structures and reducing loopholes to ensure better compliance.
Conclusion: Balancing Growth and Fiscal Stability
India’s aspiration to sustain a 6.5-7% GDP growth rate depends on robust tax revenue mobilization. The EY report underscores that achieving a tax buoyancy of 1.2-1.5 is essential for ensuring fiscal discipline and creating room for necessary government expenditures. As policymakers refine tax policies and push for structural reforms, a strategic approach to tax collection and compliance will be key to sustaining long-term economic growth.
For now, the challenge remains: Can India successfully enhance its tax buoyancy while maintaining growth momentum? The coming fiscal years will provide the answer.
