In her interim budget for FY25, finance minister Nirmala Sitharaman took credit for the surge seen in direct tax collections (mainly taxes on personal and corporate incomes) over the previous 10 years. Collections more than trebled and the number of individuals filing tax returns swelled 2.4 times, she said, presenting her sixth budget in Parliament.
Direct tax collections net of refunds touched ₹14.7 lakh crore by 10 January this year, growing 19.4% over the same period of FY23. Direct tax collections have benefited from the greater formalisation of the economy and the assiduous mining of the goods and services tax data, which has helped widen the tax base.
The 2022-23 financial year was so good for collections that it lifted the direct tax-to-GDP ratio to a 15-year high of 6.11%.
Curiously, though, the interim budget’s projections for FY25 are rather modest. It expects direct tax collections to grow 13.1%, which is more or less the same as the pre-covid trend.
Collections grew at 13.5% in the pre-covid year, FY19. They fell subsequently in the two covid years, FY20 and FY21. After that, direct tax collections shot up 40.1% in FY21, benefiting from the low base of the previous year.
It’s not clear why the budget’s makers set such conservative estimates for FY25. Perhaps to avoid missing targets or because they are unsure how much the gamble of corporate tax cuts Sitharaman announced in September 2019 will pay off.
The interim budget estimates the gross tax revenue (GTR) in the ongoing fiscal year, FY24, to be about 2.2% higher than what was projected in the previous Union Budget. This is mainly because personal income tax collections are running higher than was budgeted. The GTR is likely to be ₹34,37,211 crore, as per the interim budget’s estimates, in FY24.
For FY25, the GTR is budgeted at ₹38,30,796 lakh crore (a projection, and therefore referred to as a Budget Estimate). The interim budget, thus, projects GTR in the next fiscal year to be 11.5% higher than in FY24.
This too is more or less in line with the pre-covid trend. The Central Board of Direct Taxes’ time-series data shows that in 2015-16, GTR grew 16.7% as compared with the previous fiscal year.
The growth picked up and was 18.3% in FY17, but decelerated in FY18 (11.6%) and in FY19 (8.5%). After that, the pandemic hit tax revenues as companies faced the brunt of the lockdown, impacting direct tax collections.
The target set for GTR in FY25 is also modest: 11.7 % of GDP, merely 0.1% higher than that expected in FY24.
Within the gross tax revenue, direct and indirect taxes are respectively estimated to grow modestly at 13.1% and 9.4%.
Tax buoyancy, the responsiveness of tax revenue to changes in nominal GDP, was not computed for FY21 as both nominal GDP and tax collections contracted from the previous year. It stood at 2.52 in 2021-22 due to the base effect. But it was lower at 1.18 in 2022-23, even as tax revenues grew at 17.8% in 2022-23, higher than 15.1% nominal GDP growth.
The overall tax buoyancy is budgeted at just around 1.10 for FY25. Ideally, a tax buoyancy of 1.25 would give the government fiscal space to meet its spending commitments.
Is the government being over-cautious about projecting higher tax revenues? Or is it worried about whether the recent spurt of growth in tax collections can be sustained?
We know that inflation shores up tax revenues, and it has been high. Direct tax revenues also tend to rise when private investments are modest, as that implies a lower charge on depreciation in the absence of any increase in the capital stock of companies, which shores up their bottomlines while adding to the direct tax kitty.
Perhaps the interim budget’s bet is that inflation will trend lower and private investments will pick up, leading to higher depreciation claims.
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