Tax buoyancy

Tax buoyancy

Subject: Economy

Context: the finance secretary said the revised estimates of revenue and expenditure for the current fiscal were realistic and tax buoyancy expectations are realistic.

Concept:

• Tax buoyancy explains 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.

Tax buoyancy depends mainly on

• Size of the tax base
• Tax administration regime
• Reasonableness and simplicity of the tax rates
• Wealth creation

Trends

• Tax buoyancy was fairly moderate between 1 and 1.3 in 4 of 7 years between 1991-92 and 1997-98 and was poor in the remaining 3 years
• During the 2004-05 to 2008-09 period, the first 4 years recorded tax buoyancy between 1.3 and 1.7, a creditable performance.
• In the fifth year (2008-09), there was a sharp fall in tax buoyancy to about 0.2.
• The 2014-19 period saw steady performance in tax buoyancy.