Direct tax collections in the current year so far have been nothing short of stunning. Till January 10, the number was Rs 14.7 trillion, hitting 81% of the budget estimate (BE) of Rs 18.2 trillion. It is the personal income tax (PIT) collections that have stolen the show, having grown at a brisk 27.3% compared with the targeted growth rate of 10.5%. The main reason for this has been better compliance. Thanks to the efficient tracking mechanisms, it is near impossible to evade taxes. The shift to the new regime is also believed to have helped boost collections. Going by the current trends, the BE for PIT of Rs 9 trillion is sure to be exceeded. While the tax collections from corporations were initially slow, they too have picked up smartly. The growth has been until 12.4% year-on-year so far, ahead of the targeted pace of 10.5%. This is good news for the exchequer since direct taxes account for 54% of the gross collections.

One expects the increasing formalisation of the economy will help grow the taxpayer universe. In FY19, the number of income tax filers was 85 million, which increased to 95 million in FY23. While the actual taxpayers are barely a third of this, at some point they should start contributing to the collections. Direct taxes are probably the most effective way to transfer funds from companies and individuals to the government. Given how private sector firms are unlikely to add too much fresh capacity—except probably by way of acquisitions—for the next few years, the burden of capex will fall on the government. The government will need resources to meet its expenditure not just on infrastructure and public goods but also defence, education and health.

Indirect taxes in the current year aren’t doing too well; they were targeted to grow at 11.8% but have reported a run rate of 6% y-o-y until November. GST collections, however, have surprised on the upside and have grown at a very smart 13.4%; the average monthly GST collections until December have been `1.67 trillion. Reports to the effect that consumer spends having tapered off, post the festive and holiday seasons, are worrying.

While the budget estimates for the current year assume a tax buoyancy of 1.2, it could turn out to be better as the figure in the first half has been close to 2. The actual number is sure to touch a new peal even if it eases in the second half. While buoyancy was 1.8 in FY22, it was largely because the nominal GDP grew 18.4%, on a negative base and taxes also grew 34% because of a very low base. Ignoring this, the highest buoyancy was seen in FY16 when it was 1.6 and, before that, in FY07 and FY08, when it was 1.7.

The tax-to-GDP for the current year has been assumed at 11.3%. Given that for the first half, we are already at 11.4%, the ratio could overshoot 1.3 for the full year. It is possible gross tax collections will grow at faster than 11%—the budgeted number. In that case the tax-to-GDP could go up to 11.5%, which would be close to the high of 12.1% seen in FY08 (excluding FY22). Else, India’s tax-to-GDP has been in the range of 10- 11%.