Context: With strong growth in non-corporate tax, net direct tax collection is likely to cross budget estimates by more than ₹73,000-83,000 crore. However, tax buoyancy is likely to be lower than the last fiscal year (FY 2024) due to the revision of the nominal growth number.
Relevance of the Topic: Prelims: Basic idea about the trends, Tax Buoyancy, Tax Elasticity.
Data on Net Direct Tax Collection
- Net direct tax collection likely to cross budget estimates by more than ₹73,000-83,000 crore.
- The budget presented in July 2024 pegged the net direct tax collection at ₹22.07 lakh crore for FY25. This requires a growth rate of 12.6% over the actual collection of ₹19.60 lakh crore in FY24.
- However, data for the period between April 1 and December 17, 2024, showed that while the mop-up through advance tax after three installments grew by over 20%, the net collection is now 72% of the budget estimates.
- Advance tax payments by corporations recorded over 16% growth. This, along with good growth in GST, is expected to help the government push the fiscal deficit lower than the budgeted estimate of 4.9% for the current fiscal.
- With the rise in collections, the cost of tax collection is on a downward trend. It dipped to 0.44% in FY24 from 0.76% in FY21.
- Tax buoyancy is likely to be lower than the last fiscal due to revision of nominal growth number. Tax buoyancy could be in the range of 1.68–1.73 in FY25 against 1.86 in FY24.
Probable reasons for rise in Net Direct Tax Collections:
- Ease of Compliance:
- Simplified tax filing mechanism (like pre-filed Income Tax Returns, user-friendly online tax portal)
- Integration of PAN with Aadhar has streamlined the verification process.
- Use ofTechnology:
- Digital payment systems to file tax with simplified transactions.
- e-verification and e-assesment processes.
- Faceless Assessment Scheme for greater transparency and efficiency in income tax assessments.
- Rise in Incomes has also facilitated higher tax payments by individuals.
- Simplification of Tax Rules:
- Rationalisation of tax slabs, incentives for filing returns have led to voluntary compliance. E.g. ‘Honoring the Honest’ campaign.
- Decrease in cost of collection is attributed to:
- Adoption of centralised processing centres (E.g., CPC Bengaluru)
- Automation of processes like return filing, scrutiny and refund issuance.
- Increase in the efficiency of tax administration.
- Formalisation of the economy.
What is Tax Buoyancy?
- Tax buoyancy is a ratio of change in tax revenue in relation to change in GDP of an economy. It measures how responsive a taxation policy is to growth in economic activities.
- Taxation policy with a tax buoyancy of over 1 will deliver more tax revenue following a positive change in GDP.
- Lower the tax buoyancy, poorer is the tax collection in response to economic growth.
- The Central Government of India estimates a tax buoyancy of 1.1 for 2024-25 financial year.
Significance of Tax Buoyancy:
- It shows an economy’s capacity to finance growing public expenditure with tax revenue.
- Policy makers use the tax buoyancy ratio as a measure of their taxation policy’s reliability to deliver a steady flow of tax revenue.
- Buoyancy of tax policy helps to overcome economic exigencies.
- A highly buoyant tax policy can help a government rely on tax collection despite sudden fluctuations in earnings from other sources. For example, the planned direct tax buoyancy of India for FY25 is around 1.1.
- This will help the government meet expenditure even if its disinvestment targets are not met.
- Tax buoyancy as an indicator helps policymakers in designing pro-taxpayer taxationpolicy.
- Higher tax rates can also negatively affect willingness to pay tax and increase tax evasion. Besides, a high rate of tax disrupts economic growth.
- Policymakers can use the tax buoyancy indicator to increase tax collection without increasing tax rates.
What is Tax Elasticity?
- Tax elasticity refers to the change in tax revenue relative to changes in the tax rate.
- In simpler terms, if the government reduces the corporate income tax from 30% to 25% and the resulting change in tax revenue is observed, this reflects tax elasticity.