India’s tax collections seem to be undergoing a range of structural changes, changes which could have a far-reaching impact on the Indian economy. TCA Sharad Raghavan’s piece highlights some of the more important changes.
First, he highlights “Income tax from individuals now comprises more than 30 percent of the government’s total tax receipts, significantly exceeding the contribution of taxes paid by companies, new data from the Income Tax Department shows….the data highlights the growing share of personal income tax within both direct taxes as well as total tax collections….Personal income tax made up 53.3 percent of direct taxes in 2023-24, the highest it has been in the 24 years for which there is data. The share of personal income tax in direct taxes crossed the 50 percent mark—signifying higher reliance on it rather than on corporate taxes…
Notably, the share of corporate tax collections in direct taxes seems strongly influenced by the government’s 2019 decision to slash corporate tax rates, citing the argument that lower rates would increase investment activity and eventually yield higher taxes.
Corporate tax revenues did grow 64 percent since the rate cut, the data shows, but personal income tax collections grew 112 percent over this period, resulting in a significantly lower share of corporate tax collections in overall direct tax revenue.”
The growing reliance of the Government on personal income tax could be one of the factors behind the ongoing consumption slowdown that India is experiencing.
The second trend, Mr Sharad Raghavan highlights the growing importance of direct taxes relative to indirect taxes: “Direct taxes made up 56.7 percent of total tax collections in 2023-24, a continuation of its rising share since 2021-22. This is the highest it has been since 2009-10.
In tax policy, higher reliance on direct taxes, which are pegged to income levels and profitability, is considered a more progressive approach than an over-reliance on indirect taxes, which apply to everyone the same, regardless of income levels.
In developed economies, the share of direct taxes far exceeds that of indirect taxes. In the US, for example, corporate tax, income tax, and social security and medicare taxes together make up about 90 percent of the total tax revenue. In the OECD (Organisation for Economic Co-operation and Development) countries, the proportion of direct taxes is about 60-65 percent.”
If you join these two trends together the picture that emerges is that personal income tax payers are now the main driver of tax buoyancy in India. This is worrying because a very small percentage of Indians – around 20 mm individuals – pay Income Tax: “…the share of personal income tax in total tax collections—counting both direct and indirect tax sources—has risen to 30.2 percent as of 2023-24. This proportion was 16.2 percent in 2004-05 and 21.5 percent in 2014-15.”
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