Buoyant tax collections hold the key to keeping up the tempo of investment in building infrastructure and funding welfare schemes
In the past, invariably, the revised estimate (RE) for the relevant financial year (FY) fell short of the budget estimate (BE). During the last two years, the position has reversed with RE exceeding the BE. In fact, the trends during the first six months of the current FY point toward the Modi – government doing a hat–trick.
Look at the gross tax revenue (GTR) which includes gross direct tax revenue (GDTR), GST collection, central excise duty (CED) and customs duty (CD) – net of refunds. During 2021-22, the BE for GTR was Rs 22,20,000 crore. Against this, the RE (mentioned in the budget for 2022-23 presented on February 1, 2022, it includes the actual for the first ten months and estimates for the last two months of the FY) at Rs 25,20,000 crore was Rs 300,000 crore higher. The ‘actual’ at Rs 27,10,000 crore turned out to be even higher than the RE by Rs 1,90,000 crore. When, compared to BE, the excess was a whopping Rs 490,000 crore.
For 2022-23, Nirmala Sitharaman kept BE for GTR at Rs 27,60,000 crore. Against this, the RE at Rs 30,40,000 crore was Rs 280,000 crore higher. The ‘actual’ at Rs 30,50,000 crore turned out to be even higher than the RE by Rs 10,000 crore. When compared to BE, the actual was thus higher by Rs 290,000 crore. The excess amount would have been even more at Rs 380,000 crore but for a cut in CED on petrol and diesel announced in May 2022, which resulted in a revenue loss of about Rs 90,000 crore.
For the current FY, Sitharaman has kept the BE for GTR at Rs 33,50,000 crore including GDTR (net of refunds, but before transfers to states): Rs 1823,000 crore; GST (it includes Central GST and Integrated GST or IGST collection apportioned to the central government): Rs 957,000 crore; CED on petroleum products: Rs 339,000 crore and CD (on imports): Rs 233,000 crore.
From April 1 to October 9, 2023, GDTR at Rs 957,000 crore was 21.8 per cent higher than the actual collections during the corresponding period of last FY as against 11.6 per cent higher as per BE. This, in turn, was due to a sharp jump in personal income tax (PIT) collections of 32.5 percent even as corporate income tax (CIT) collections were up by 12.4 percent. At this pace, the year could end up with a GDTR of over Rs 1900,000 crore against BE of Rs 1823,000 crore.
Likewise, total Central GST collections during the first half of the current FY stood at Rs 414,000 crore, 15.9 per cent higher than the corresponding period of last year as against the 12 per cent growth projected as per the BE. At this pace, the total central GST collections could surpass the BE of Rs 957,000 crore.
As for CED on petroleum products, in view of the Minister of Petroleum and Natural Gas, Hardeep Singh Puri has ruled out the possibility of any reduction in duties on petrol and diesel, there won’t be any shortfall in collections under this head. What is behind this exceptional performance in tax collection consistently for the three years?
Two overarching factors come to mind. First, has to do with growth in nominal GDP. Since taxes are levied as a percentage of the value of income-generating activities in different sectors that make up the GDP, their collection increases in tandem with it. During 2021-22, nominal GDP grew by 18.4 per cent which was 4 per cent higher than the 14.4 per cent growth assumed for arriving at the BE. Likewise, during 2022-23, nominal GDP grew by 15.9 per cent which was 5.6 per cent higher than the 10.3 per cent growth assumed in the budget.
The other factor has to do with the tax-GDP ratio. For any given level of nominal GDP, if this ratio is higher, that would lead to higher tax collection. During 2021-22, the actual tax-GDP ratio was 11.5 per cent against 9.9 per cent assumed in the budget. Likewise, during 2022-23, the actual tax-GDP ratio was 11.2 per cent against 10.7 per cent assumed in the budget. The unprecedented surge in tax collection in both years was due to the combined effect of higher-than-expected growth in nominal GDP as well as the tax-GDP ratio.
For 2023-24, the FM has assumed nominal GDP growth of 10.5 per cent The actual growth during the first quarter of the current FY at 8 per cent turned out to be even lower than this (actual for 2022-23 was 15.9 per cent). The position during the second quarter won’t be different. Yet, if tax collections during the first half of the current FY have grown faster than the BE, this has to do with a much higher tax-to-GDP ratio. The budget estimated the ratio at 11.1 per cent.
The higher tax-to-GDP ratio is all the more creditable when we consider a steep reduction in the CIT rate to 15 per cent for new manufacturing enterprises and to 22 per cent for existing firms (done in September 2019); a reduction in the PIT (announced in the budget for 2023-24) and reduction GST rates notified from time to time. So, what has done the trick?
This has to do with relentless efforts by the tax authorities to ensure compliance and prevent evasion. On the direct tax front, they have successfully used technology to reach out to the assesses in non-intrusive ways; e.g. by sending e-mail reminding them to file a return if not already or generating an ‘auto-populated’ form – a form in which income of the assesses from various sources is pre-filled. In particular, the use of data analytics and AI has prompted assesses to report their income accurately thereby avoiding short payment.
According to the SBI report, in assessment year (AY) 2011-12, a total of 16 million people filed ITR, with 84 per cent belonging to the Rs 500,000 income group. In AY 2022-23, 68.5 million people filed ITRs, with the filers in the Rs 500,000 income group decreasing to 64 per cent. Total ITRs filed for income above Rs 10 million increased from 146,000 in AY 2021-22 to 269,000 in AY 2023- 24. Based on spending profile data collected from diverse sources, the IT department is vigorously pursuing efforts to tax more persons in this class.
On the indirect tax front, tax authorities are focusing on strengthening of GST infrastructure with an emphasis on driving all businesses to be a part of the GST network, truthfully report all transactions and prevent fraudulent input tax credit or ITC claims. During 2022-23, they detected GST evasion of over Rs 101,000 crore and recovered Rs 21,000 crore. For the current FY, so far they have detected evasion of Rs 136,000 crore and hope to recover around Rs 50,000 crore (of this, Rs 14,108 crore has been already recovered).
More such efforts including rationalisation of the tax regime to plug loopholes are under way. For instance, recent clarification on the levy of GST @28 per cent on e-gaming alone has the potential of yielding extra tax collection of over Rs 100,000 crore annually. In view of a lot more potential remaining untapped, Modi should aim at a tax-GDP ratio of at least 20 per cent. Given the pace at which his government is moving, it is eminently possible.
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