The Centre has been remarkably successful at meeting its fiscal deficit targets in recent years. Buoyant tax collections have had a big role to play in this. The latest time-series of tax data throws light on this growth. The data, compiled by the Central Board of Direct Taxes, highlights three positive trends.
First, a ten-fold expansion in the Centre’s total tax revenues in the last two decades from ₹3-lakh crore to ₹30-lakh crore, endowing the Union with enormous spending power. This has made possible universal welfare schemes such as the PM Garib Kalyan Yojana. The growth in tax collections during the UPA period (FY05-FY14) averaging 14 per cent was much higher than during the recent NDA rule (FY14-FY23) at 11.6 per cent. But the latter was marked by the Covid setback to economic activity and a cut in corporate tax rates. Tax revenues in the last three years (till FY23) have managed to bounce back, reverting to their historical growth rate of over 14 per cent. Second, it has been a long-standing lament that the economy rests on an extremely narrow tax base. The data show that there has been considerable improvement on this front.
The number of entities filing returns has more than doubled from 3.3 crore to 7.4 crore between FY14 and FY23, with the growth in individual filers (3 crore to 6.9 crore) accounting for the bulk of this increase. Given that a majority of return-filers declare zero tax liability, the expansion seems to be driven by tax laws mandating returns for individuals claiming rebates, and the imposition of PAN and tax collection at source on a host of new transactions. Hopefully, tax revenues from these assessees will improve once their incomes rise beyond the exempt threshold. Third, the contribution of direct taxes to total tax revenues which had dipped to 49.6 per cent in FY17 has recovered to 54.6 per cent in FY23. Direct taxes are more progressive than indirect taxes which impose an equal burden on the rich and the poor.
One aspect of the tax data that needs attention is the sluggish growth in corporate tax revenues relative to personal income tax. In the last nine years, personal tax collections have grown at an annual rate of 14.6 per cent while corporate tax revenues have grown at 8.6 per cent. Companies were granted significant tax relief just ahead of Covid, with their base tax rate cut from 30 to 22 per cent, even as the top slab for personal taxpayers was kept at 30 per cent. Yet, as the economy has rebounded from Covid, personal tax collections have expanded by 69 per cent in the last three years (FY20-FY23), while corporate tax collections have expanded by 48 per cent. National income statistics and household savings data suggest setbacks to personal income post-Covid, while corporate earnings have multiplied. It is perhaps time the anomaly between personal and corporate tax rates is corrected by granting relief to individual taxpayers.