IMF Paper: How Developing Nations Can Fix Their Tax Systems to Fund Their Own Future
SDG 8: Decent Work and Economic Growth | SDG 17: Partnerships for the Goals
Institutions: Ministry of Finance
The International Monetary Fund (IMF) released a key report, Building Tax Capacity for Growth and Development: Evidence-Based Analysis for Mobilizing Domestic Revenue, asserting that for developing nations to genuinely fund their own progress and meet Sustainable Development Goals (SDGs), they must radically improve tax collection. The core finding is that many countries could boost their government income by up to 5 percent of their national income (GDP), but the chief obstacle is poor administrative and legal systems. The solution requires a “whole system approach”—coordinating tax policy (what to tax), tax law (the written rules), and tax administration (how the tax office operates). Effective reform strategies include simplifying confusing tax rules, broadening the tax base by closing loopholes, and making tax collection less painful. Crucially, tax agencies must focus on building public trust, simplifying administrative procedures, and using sophisticated digital tools (like automated filing and data analysis) to efficiently target large-scale tax evasion instead of burdening honest citizens.
This analysis is critical for the Ministry of Finance as India modernizes its tax architecture (like the GST and direct tax systems). It validates India’s heavy investment in digital platforms to streamline compliance and build public trust, directly informing strategies to sustainably maximize revenue generation. Despite the recent improvements, India’s ratio is still low compared to the average for OECD countries (around 34%) and falls short of the World Bank’s recommended benchmark of 15% for developing countries to achieve sustained economic growth and poverty reduction.
What is the minimum Tax-to-GDP benchmark recommended for development? The IMF and UN have set a standard known as the Compromiso de Sevilla, which calls for a nation to collect at least 15% of its total economic output (GDP) in taxes. Reaching this ratio is considered vital not just for raising money, but as evidence that the state has established strong institutional capacity and secured sufficient internal funding (Domestic Revenue Mobilization) to invest in its own infrastructure, health, and education without relying heavily on external debt or aid.
Follow the full paper here: https://www.imf.org/en/Publications/Departmental-Papers-Policy-Papers/Issues/2025/10/08/Building-Tax-Capacity-for-Growth-and-Development-Evidence-Based-Analysis-for-Mobilizing-570648