Direct Tax Buoyancy, Revenue Foregone, Tax Base

Subject: Economy

Context:

• The gross direct tax collection in 2019-20 fiscal dipped 4.92 per cent to Rs 12.33 lakh crore on account of reduction in corporate tax rate, increased standard deduction and personal I-T exemption limit, the Income Tax department.
• The gross collections would have clocked 8 per cent growth to Rs 14.01 lakh crore in 2019-20 if revenue foregone in corporate tax and Personal Income Tax is taken into account.
• By removing the effect of the extraordinary and historic tax reform measures and higher issuance of refunds during the FY 2019-20, the buoyancy of total gross direct tax collection comes to 1.12

Concept:

Tax Buoyancy

• Tax buoyancy explains this relationship between the changes in government’s tax revenue growth and the changes in GDP.
• It refers to the responsiveness of tax revenue growth to changes in GDP.
• When a tax is buoyant, its revenue increases without increasing the tax rate.
• A similar looking concept is tax elasticity. It refers to changes in tax revenue in response to changes in tax rate.

Revenue Foregone

• The revenue forgone is also referred to as tax expenditure or indirect subsidy to taxpayers.
• The tax policy provides specific tax incentives which give rise to tax preferences. Such preferences have a definite revenue impact
• The Indian government started publishing the Statement of Revenue Foregone in 2006. This estimate of revenue foregone is intended to indicate the potential revenue gain if all tax incentives (exemptions, deductions, and similar measures) were rationalized.

Tax Base

The tax base is the total amount of assets or revenue that a government can charge tax on. For example, the assessed value is the tax base for property taxes and taxable income is the tax base for income tax. It can also be defined as the total of taxable income, taxable assets, and the assessed value of property within the government tax jurisdiction.

Tax Base in India

The tax base is different for direct tax and indirect tax. Direct taxes include income tax and property tax, whereas indirect taxes include GST, excise duty, and customs duty.

The Income Tax Act under direct tax laws lays down the regulations of income tax. For example, an individual and HUF assessees with income more than Rs.2.5 lakh has to pay tax under the income tax. But there is no such income limit for other assessees like companies, partnership firms. The total of taxable income from all taxpayers constitutes the tax base.

The Goods & Services Tax Act decides the GST base under indirect tax laws. For example, a registered person whose turnover is above Rs.40 lakh has to pay GST. The turnover of all taxpayers will constitute the tax base.

To arrive at the tax liability, we should multiply the tax base with the respective tax rate.

The size and growth (increase or decrease) of the tax base is crucial to the planning of local, state, or central government. The tax base size influences the taxable revenues which are available to a government. There is a direct correlation between the economic condition of the country and the budget of the government. The government has to always consider how their decisions will affect their tax base.