The Modi Government has successfully addressed all key aspects to ensure the strength and resilience of the tax system

The robustness of the tax regime in a country can be tested by looking at its ability to engineer and sustain an accelerated growth in its GDP (gross domestic product); help the government in garnering tax revenue commensurate to growth in GDP and be ‘progressive’ in as much as it collects more taxes from those who can afford to pay more while imposing less burden on those who can’t.

Look at the growth in real GDP which is GDP at constant prices. After a decline of 5.8 percent during 2020-21 caused by Corona – pandemic, growth in real GDP rebounded to 9.1 percent during 2021-22. It was 7.2 per cent during 2022-23. The pace was maintained at a high of 7.7 per cent during the first half of the current FY. For the whole year, growth is estimated to be over 7 per cent.

For tax collection purposes, we need to look at nominal GDP (NGDP) which is GDP at current prices. During 2021-22, growth in NGDP was 18.4 per cent which was higher than the budget estimate (BE) of 14.4 per cent. During 2022-23 also, growth at 16.1 per cent was significantly higher than BE of 10.3 per cent.

During the first half of the current FY, growth decelerated to 8.6 per cent which was lower than the BE 10.8 per cent. This was due to negative inflation as measured by the wholesale price index (WPI) during the first half. During the second half, growth is expected to be higher as the WPI will move to positive territory. For the whole year, it is expected to be 9 – 9.5 per cent.

Let us look at gross tax revenue (GTR). It includes gross direct tax revenue (GDTR), GST collection, central excise duty (CED) and customs duty (CD) - net of refunds. GST collection includes Central GST and Integrated GST or IGST collection apportioned to the central government. CED is essentially excise duty collected on petroleum products that fall outside the GST ambit.

During 2021-22, GTR grew by 33.8 per cent over the previous year as against the 9.6 per cent projected in the budget. It reflects the combined effect of high growth in NGDP and high ‘responsiveness’ of tax revenue for every percentage change in GDP – also known in jargon as ‘tax buoyancy’. The NGDP growth is 18.4 per cent, and tax buoyancy comes to 1.8 (33.8/18.4). This led to a tax-GDP ratio of 11.5 per cent against BE of 9.9 per cent.

During 2022-23, GTR grew by 12.7 per cent as against BE of a mere 1.8 per cent (having achieved a big jump during 2021-22, considering the higher base, the government was pretty conservative in its estimation). Although tax buoyancy at 0.8 (12.7/16.1) was less than 1, the tax-GDP ratio remained at a high of 11.2 per cent (against BE of 10.7 per cent) largely because of high inflation during the year.

The impact of all these favourable factors is reflected in the GTR increasing by a whopping Rs 1025,000 crore in just two years to reach Rs 3050,000 crore during 2022-23. For the current FY, Finance Minister Nirmala Sitharaman has kept the BE for GTR at Rs 3350,000 crore which works out to an increase of 9.8 per cent over the actual for 2022-23. Against this, the actual increase in GTR during the first half was 16.3 per cent over the corresponding period of last year. Considering that the growth in NGDP was a modest 8.6 per cent, it implies a high tax buoyancy of 1.9 (16.3/8.6) leading to a much higher tax-to-GDP ratio.

The BE for GTR at Rs 3350,000 crore includes GDTR: Rs 1823,000 crore; GST: Rs 957,000 crore; CED: Rs 339,000 crore and CD (on imports): Rs 233,000 crore. From April 1 to October 9, 2023, GDTR at Rs 957,000 crore was 21.8 per cent higher than the actual collections during the corresponding period of last FY as against 11.6 per cent higher as per BE. This, in turn, was due to a sharp jump in personal income tax (PIT) collections of 32.5 per cent even as corporate income tax (CIT) collections were up by 12.4 per cent. The GDTR during the current FY till January 10, 2024, is Rs 1718,000 crore. At this pace, for the whole of the current year, GDTR is likely to exceed the BE Rs 1823,000 crore by about Rs 100,000 crore.

The total Central GST collections during the first half of the current FY was Rs 414,000 crore which is 15.9 per cent higher than the corresponding period of last year as against 12 per cent growth as per the BE. For the whole year, Central GST collections could exceed the BE by Rs 10,000 crore. Put together, the excess tax revenue of Rs 110,000 crore will help the Modi – government in offsetting the revenue shortfall in other areas such as proceeds of disinvestment thereby ensuring that the fiscal deficit remains well within the 5.9 per cent target.

The important takeaway from the above analysis is: that tax collection grew at a fast pace due to high nominal GDP growth reinforced by high tax buoyancy. The high tax buoyancy has been particularly helpful in lifting tax collection during the current FY. High tax buoyancy, in turn, has to do with relentless efforts by the tax authorities to ensure compliance and prevent evasion.

On the direct tax front, they have successfully used technology to reach out to the assesses in non-intrusive ways; e.g. by sending e-mail reminding them to file a return if not already or generating an ‘auto-populated’ form – a form in which income of the assesses from various sources is pre-filled. In particular, the use of data analytics and AI has prompted assesses to report their income accurately thereby avoiding short payment.

On the indirect tax front, tax authorities are focusing on strengthening of GST infrastructure with an emphasis on driving all businesses to be a part of the GST network, truthfully report all transactions and prevent fraudulent input tax credit or ITC claims. During 2022-23, they detected GST evasion of over Rs 101,000 crore and recovered Rs 21,000 crore. For the current FY, detected evasion could touch Rs 300,000 crore. Of this, they hope to recover around Rs 50,000 crore during the current year itself.

Is the present tax regime progressive?

Taxes levied on the flow of goods and services or ‘indirect tax’ are inherently regressive as all persons irrespective of their income pay for these at the same rate. On the other hand, a tax on their income or ‘direct tax’ is progressive; a person earning more pays at a higher rate. With these basics, let us look at relevant numbers.

The indirect tax to GDP ratio has gone up from 4.7 per cent during 2019-20 to 5.2 per cent during 2022-23. In contrast, the direct tax to GDP ratio increased from 5.3 per cent during 2019-20 to 6 per cent during 2022-23. This being higher than the indirect tax to GDP ratio of 5.2 per cent shows that the government is moving towards a progressive taxation structure.

Look at it from another angle. Of the likely gross tax collection of Rs 3460,000 crore during 2023-24, the direct tax collection is expected to be Rs 1923,000 crore which works out to 56 per cent, the remaining 44 per cent is indirect tax. This also reinforces that India is moving away from a regressive tax regime.

(The writer is a policy analyst, views are personal)