Push for a bigger share of direct taxes in the economy

By: |
October 01, 2021 3:45 AM

The govt must ensure that the base for direct taxes is widened, and also that the rates are rationalised by phasing out exemptions

Going by the trend so far, the share of direct tax revenues could be bigger than that of indirect taxes.Going by the trend so far, the share of direct tax revenues could be bigger than that of indirect taxes.

Tax revenues in FY22 so far have surpassed expectations and could well exceed the budgeted Rs 22.17 lakh crore. Even though the base effect could slow the pace of direct tax collections, these could overshoot the projected Rs 11.15 lakh crore having jumped 101% y-o-y in April-August. The 50% y-o-y increase in advance tax collections indicates companies and individuals expect the rest of the year to go well; PIT collections have grown by 69%, way above the average of 10-12%. Again, the mop-up from GST, which have averaged more than Rs 1 lakh crore, are reasonably robust, and indirect taxes have now risen 52% in April–August.

Going by the trend so far, the share of direct tax revenues could be bigger than that of indirect taxes. Last year, the share of direct tax revenues in the total gross tax revenues was 4.7% of the GDP, whereas the share of indirect tax revenues was 5.4% of the GDP. This was also true in FY17—the year of demonetisation—when direct tax revenues, at 5.52% of GDP, were a shade lower than the 5.63% of GDP for indirect taxes. One reason for this was the sharp increase in levies on petroleum products, following the fall in the prices of crude oil; else, the share of direct tax revenueswould have overshot that of indirect taxes.

To be sure the Centre and the states will both mop up very large sums by way of taxes on auto fuels, this year, given that prices have risen sharply while volumes have remained stable. But, it is important the economy gets a bigger share of direct taxes; an excess of indirect taxes in the kitty is rightly considered to be inequitable, the argument being that individuals, regardless of their incomes, are subject to the same levies on products and services. In the case of direct taxes, the rate of tax is linked to the level of the income. This is one reason experts have called for lower GST rates or other indirect levies like those on auto fuels. However, it is the direct-tax base that needs to be widened and the rates rationalised by phasing out exemptions.

Revenue secretary Tarun Bajaj expects the Centre’s gross tax-to-GDP ratio to move up to 12% of GDP in the medium term, from just 10.3% in FY21 and between 11-11.2% over FY17-19. That is possible going by current trends. Moreover, he believes tax buoyancy will cross 1% from this year onwards. Since tax buoyancy includes all additional revenue measures—many of which are not made known publicly—the secretary is in a better position to assess the numbers. However, as economist Renu Kohli observed, the true level of tax buoyancy is challenged by inability to distinguish total revenue receipts from the impact of discretionary measures and the improvements in compliance, enforcement and administration. The government needs to put out more information in the public domain so that the receipts from an ‘unchanged taxation system’ are known and the real level of buoyancy can be ascertained.

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