The Income Tax Department of the Central Board of Direct Taxes (CBDT) released the Time Series Data for the Financial Year 2000-01 to 2023-24, recently. The database contains nine datasets covering the number of taxpayers, taxes collected and income tax return related data in a disaggregated form, which is valuable for framing tax policies and procedures.

Based on the datasets, this piece carries out a comparative analysis between Personal Income Tax (PIT) and Corporate Tax (CT) for the decade 2014-15 to 2023-24, which includes three pandemic years, i.e., 2019-20 to 2021-22.

Aggregates: Nominal vs. Real

In nominal terms, during the specified decade, PIT grew at a Compound Annual Growth Rate (CAGR) of 16.43 per cent which was almost twice the CAGR posted by CT at 8.73 per cent. In real terms, i.e., adjusting for inflation, CAGR of PIT worked out to 11.85 per cent, whereas that of CT was far below at 4.46 per cent. (GDP deflator used for inflation adjustment.)

In nominal/real terms, the share of CT in the total of PIT and CT (total direct tax) gradually declined to 46.6 per cent in 2023-24 from 61.7 per cent in 2014-15, whereas that of PIT rose to 53.4 per cent from 38.3 per cent during the same period.

Further, in nominal/real terms, the CT/GDP ratio gradually fell from 3.44 per cent to 3.08 per cent, while the PIT/GDP ratio increased from 2.13 per cent to 3.54 per cent, during the decade.

Two conclusions follow from the above findings: (a) PIT contributed increasingly more to the direct tax pool than CT and (b) inflation played an important role in tax inflows. The former, i.e., (a) could mainly be attributed to increasing income, simplified PIT laws and procedures, increasing public awareness about the benefits of filing returns, and willingness to file returns.

Buoyancy Factor

Buoyancy Factor (BF) is defined as the ratio of tax growth rate to GDP growth rate. Excluding 2020-21 when the growth rates of GDP, CT and PIT were negative, BF for PIT ranged from 0.65 to 2.65, whereas that in respect of CT stayed between -2.52 and 2.95.

Excluding 2020-21, BF for PIT exceeded that for CT in all but two years.

Thus, it was concluded that the PIT growth was more responsive to GDP growth compared to CT.

Agriculture Sector

It is common knowledge that no direct tax is levied on this sector. However, when the direct tax/GDP ratio is computed, the sector is included in GDP, thereby depressing the ratio. We computed the ratio of CT and PIT to Gross Value Added at Basic Prices (GVA) at current prices ignoring the GVA by the agriculture and allied sectors.

The results revealed that if the agriculture and allied sectors were excluded, then CT/GVA would improve by 73 to 83 basis points, albeit on a declining trend basis.

Contrastingly, the PIT/GVA ratio would improve by 49 to 84 basis points, on an increasing trend basis.

This makes a case for bringing the agriculture and allied sectors into the direct tax purview, especially the large and super-large agriculturists.

Latest data available in the government’s Agricultural Statistics at a Glance reveal that there are 8,38,406 large farm land holdings (i.e., above 10 hectares) with average holding size at 17.07 hectares. Moreover, plantation and horticultural crops are being increasingly grown these days which fetch good prices both at domestic and export markets.

The proposal may sound economically appropriate, but it would be politically infeasible.

As PIT is directly related to personal income, obviously, the inequality in income distribution, which is large and increasing, also gets built into PIT.

Thus, there’s a case for taxing the super-rich at a rate higher than the rich alone.

Tax literacy, combined with simplified tax policies and procedures, increasing digitalisation. smoother grievance redressal mechanism, and stricter and quicker ways to punish tax evaders will go a long way in increasing direct tax collections.

The middle class comprising the salaried and pensioners need to be given more fair treatment in terms of income tax as they are honest taxpayers and as the PIT data show, they support both the bottom and top of the ‘pyramid.’

Creation of ‘decent’ employment opportunities will generate more PIT.

Commission paid by the government to banks to collect direct taxes should be remunerative enough so that the latter allots more branches to collect the taxes.

CBDT should publish more granular data than what they are publishing now.

The writer is a former senior economist with SBI. Views expressed are personal