A decrease in tax to GDP ratio of a country indicates which of the following?

1. Slowing economic growth rate
2. Less equitable distribution of national income

The tax-to-GDP ratio is a measure of a country's tax revenue as a percentage of its Gross Domestic Product (GDP).

Statement 1: A decrease in economic growth is a significant factor that can lead to a decrease in the tax-to-GDP ratio. For example, in 2018-19, India's gross tax-to-GDP ratio declined to 10.9% due to lower than anticipated GST collections. Statement 1 is correct.

Statement 2: While inequitable distribution of national income can contribute to a persistently low tax-to-GDP ratio, it's typically a long-term structural issue rather than a cause of a decrease in the ratio over a short period. Short-term fluctuations are often due to factors like tax evasion, tax avoidance, and inefficient tax collection. Statement 2 is not correct.

Hence, only statement 1 is correct.

Sources:

• Investopedia - Tax-to-GDP Ratio
• The Economic Times - What is tax-to-GDP ratio? Where does India fare on this indicator?
• The Economic Times - Tax-GDP ratio will improve in coming years: Economic Survey