Trends in the tax revenue

Trends in the tax revenue

Subject: Economy

Section: Fiscal Policy

Context:

Gross tax collections grew to Rs 27.07 lakh crore in FY22, a 33.5% rise over last fiscal’s mop-up. The improved revenue buoyancy also reflected in tax-to-GDP ratio rising to over two-decade high of 11.7%

Details:

• India’s gross tax revenues surged 34% in 2021-22 to exceed ₹27 lakh crore against the Budget estimate of ₹22.17 lakh crore
• Corporation tax collections rose by 56.1% and personal income tax grew about 43%, taking overall direct tax growth to 49%
• The Customs duty collections went up by 48%,excise duty collections have contracted 0.2% and the Central GST has grown by almost 30% taking the overall indirect taxes growth by 20%
• The tax-to-GDP ratio at 11.7%, from 10.3% in the previous year and is the highest since at least 1999.
• Direct taxes are 6.1% of GDP, and indirect taxes are 5.6%
• Tax buoyancy ratio is ‘very healthy’ at 1.9 with 2.8 for direct taxes and 1.1 for in- direct taxes in 2021-22.
•  The ratio of direct to indirect taxes recovered from 0.9 in 2020-21 to 1.1 in 2021-22.
• The aggregate devolution to States has overshot the RE by about ₹95,000 crore.

Long term trends:

Long term fiscal indicators(% of GDP and growth rate)

Concept:

Tax buoyancy explains this relationship between the changes in the 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 tax is considered buoyant if it is above 1. The tax buoyancy came in at about 2, which means the rate of growth in tax collection was around twice as fast as nominal GDP growth.

Determining factors:

• the size of the tax base
• the friendliness of the tax administration
• the reasonableness and simplicity of the tax rates
• lesser the tax rebates and reductions

The tax-to-GDP ratio is the ratio of the tax revenue of a country compared to the country’s gross domestic product (GDP). This ratio is used as a measure of how well the government controls a country’s economic resources. Tax-to-GDP ratio is calculated by dividing the tax revenue of a specific time period by the GDP.

Receipts

A tax-to-GDP ratio of 15% or higher ensures economic growth and, thus, poverty reduction in the long-term, according to the World Bank

The receipts of the Government have three components —revenue receipts, non-debt capital receipts and debt-creating capital receipts.

• Revenue receipts involve receipts that are not associated with increase in liabilities and comprise revenue from taxes and non-tax sources.
• Non-debt capital receipts are part of capital receipts that do not generate additional liabilities. Recovery of loans and proceeds from disinvestments would be regarded as non-debt receipts since generating revenue from these sources does not directly increase liabilities, or future payment commitments.
• Debt-creating capital receipts are ones that involve higher liabilities and future payment commitments of the Government.

Gross vs Net tax revenue-From the point of view of budgeting

•  Gross tax revenue means the sum of total direct taxes of union and total indirect taxes of unions.
•  Net tax revenue is Gross Tax Revenue minus Revenue shared between states.