Tax buoyancy helps Centre align with its fiscal consolidation roadmap

Tax buoyancy helps Centre align with its fiscal consolidation roadmap

Subject: Economy

Sec: Fiscal Policy

Context:

• The strong growth in tax revenues reflects the high tax buoyancy, which works out to be 1.2 in the revised estimates for financial year 2023-24 as against 1.0 in FY23.
• For 2024-25, the tax buoyancy is seen at 1.1.

Trends in the budget:

Direct taxes:

• Direct tax revenues have shown a sharp surge, with income tax seen overshooting the Budget estimate for this financial year by 13.5 per cent
• The Securities Transaction Tax (STT) revenue was seen exceeding the budget estimate by 15.8 per cent.
• For the next financial year, direct tax collections, which include income tax and corporate tax, are estimated to rise 13.1 per cent to Rs 21.99 lakh crore.
• Direct tax revenues are estimated to grow 17.2 percent year-on-year to Rs 19.45 lakh crore in the current financial year 2023-24.
• The income tax collections in 2023-24 have shown a sharp pickup and are expected to exceed the Budget estimate by Rs 1.2 lakh crore.
• Corporate tax collections have been maintained at the Budget estimate level of Rs 9.23 lakh crore.
• Income tax revenues are seen exceeding corporate tax collections, even though they had been budgeted at a lower level than corporate tax revenue in the Budget estimates for 2023-24.
• Securities Transaction Tax, which is levied on traded securities on bourses, is estimated to increase to Rs 32,000 crore in the revised estimates of 2023-24, an increase of 27.6 percent from the actual revenue in 2022-23.
• For 2024-25, STT revenues are estimated to rise to Rs 36,000 crore.
• The government’s gross tax revenue is estimated to grow 11.5 percent to Rs 38.31 lakh crore in the next financial year.
• The Centre’s net tax revenues are estimated to grow by nearly 12 percent to Rs 26.02 lakh crore in 2024-25.
• Over the past few years, the government’s revenue collections, especially tax collections, have turned out to be better than budgeted.
• The budgeted tax revenue buoyancy for FY24 was 1.07x, but as per FY24 revised estimates, it came in at 1.19x.

Indirect taxes:

• On the indirect taxes side, Central Goods and Services Tax (CGST) collections are estimated to grow 13 per cent to Rs 9.18 lakh crore in 2024-25.
• Overall, the indirect tax collections, which include customs, excise duties and GST (including compensation cess), are expected to yield Rs 16.22 lakh crore to the government in 2024-25.
• In the current financial year, the revised estimate for customs and excise duty collections have been lowered to Rs 2.19 lakh crore and Rs 3.08 lakh crore, respectively, while GST collections (including compensation cess) are estimated at the budgeted level of Rs 9.57 lakh crore.

About Tax Buoyancy:

• 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 which 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