Economic growth boosts India's tax collection

At this juncture when the economy is witnessing not so robust growth momentum, the impressive surge in revenue collection has come as a big relief for the Congress-led UPA regime at the centre now facing the challenge of further bringing down the fiscal deficit-the net difference between the government expenditure and income.

Much to the pleasant surprise of the revenue officials the tax collection — both on direct and indirect tax heads — zoomed to nearly Rs 7.92 lakh crore in 2010-11 exceeding even the revised estimate shown in the Budget for 2011-12.

The total Budget estimate for both direct and indirect tax collections was pegged at Rs 7,46,651 crore in the fiscal 2010-11. This was finally   revised upwards to Rs 7,86,888 crore. But when the revenue officials made the final compilation the actual revenue collection at the end of financial year 2010-11, it jumped to Rs 7.92 lakh crore thus posting a record 27 per cent growth over that of previous fiscal. The tax revenue collection stood at Rs 6,24,527 crore during the fiscal 2009-10. An analysis of actual revenue collection during 2010-11 shows that of the total direct tax collection, mainly personal Income Tax and Corporate Tax, the government collected revenue to the tune of about Rs 4.50 lakh crore.

The remaining Rs 3.42 lakh crore came from Indirect taxes comprising of Central Excise, Customs duty and Service Tax. The government had earlier estimated a direct tax collection of Rs 4.30 lakh crore and revised it to Rs 4.46 lakh crore while presenting the Budget 2011-12.

Positive factors

As senior officials of the Central Board of Direct Taxes (CBDT) say impressive surge in direct tax collection in the fiscal 2010-11 has taken place despite the Income Tax Department’s having paid Rs 72,000 crore in refunds.

Reflecting general buoyancy in revenue collections the actual indirect tax collection on three heads—Customs, Central Excise and Service Tax-- in 2010-11 shot up to about Rs 3.42 lakh crore as against the revised estimate of Rs 3.38 lakh crore.

Compared to actual indirect tax revenue collection of Rs 2.44 lakh crore in 2009-10 the tax collection at Rs 3.42 lakh crore in 2010-11 posted an impressive growth of nearly 40 per cent.

How did the government manage to get so much money from taxes? As analysts say the impressive buoyancy in tax revenue collection is primarily due to robust economic growth in the last fiscal 2010-11.

The growth momentum of the Indian economy, which posted a remarkable recovery from the quagmire of global slowdown that set in late 2008, laid the base for buoyancy in revenue collection.

As the Chief Economic Adviser in the Finance Ministry Prof Kaushik Basu says “the Indian economy has emerged with remarkable rapidity from the slowdown caused by the global financial crisis of 2007-09. With growth in 2009-10 now estimated at 8 per cent of the Gross Domestic Product (GDP) and 8.6 per cent in 2010-11, the turn around has been fast and strong.”

The growth was strong in 2010-11 with a rebound in agriculture and continued momentum in manufacturing in most part of the fiscal. The pick up in growth momentum is one of the factors that have laid to buoyancy in revenue collection, says Basu. The rise in GDP growth rate primarily reflects that there was expansion in wide range of economic activities including manufacturing and service sector. More expansion of economic activities means more scope for the government to get revenue through taxes.

Of course, the government is also reaping major benefits from the sharp rise in international crude prices. Since both customs (on imported crude and petroleum products) and excise duty (on domestic sales) are levied on advalorem basis, higher the oil price bigger is the tax collection.

Another reason for robust tax growth was the partial withdrawal of economic stimulus measures in the Budget 2010-11. Under the process of partial withdrawal of economic stimulus measures, which were given by the government in 2009 to enable the economy to withstand the ripple effect of global slowdown, the Budget for 2010-11 partially rolled back reduction in Excise Duty on wide range of commodities.

Thus the hike in duty level has led to rise in the revenue collection realised through indirect taxes. In fact the Budget for 2010-11 had begun the process of fiscal consolidation with a partial withdrawal of the stimulus measures as at that juncture there was clear evidence of economic recovery.

As Prof Basu says the policy stance was to continue to aid the growth momentum in the short run to facilitate its attaining pre-crisis levels and simultaneously to address long-term sustainability concerns.

The overall phenomenon of growth momentum during 2010-11 more or less attaining pre-crisis level along with partial withdrawal of stimulus packages through hike in tax rates have led to buoyancy in revenue collection. As analysts point out the full impact of fiscal stimulus measures relating to Excise duty cuts and the indirect impact on gross tax revenues became evident only in 2009-10.

Encouraging signs

As a proportion of GDP, gross tax revenues declined from 10.8 per cent in 2008-09 to 9.6 per cent in 2009-10. The levels would have been even lower in 2008-09 had the nominal GDP grown at trend levels. Thus the Budget for 2010-11 partially restored the Excise duties and with economic recovery gaining momentum envisaged a rise in the tax GDP ratio to 10.8 per cent during the fiscal 2010-11. This implied a year-on-year growth of 19.1 per cent.

At the time of preparation of Budget for 2010-11 the Finance Ministry had envisaged that with the restoration of Excise duty levels, albeit partial, was expected to result in a year-on-year growth of 26.1 per cent in 2010-11.

One of the positive spin offs of buoyancy in revenue collection will no doubt give the much needed elbow room to fund multitudes of popular developmental projects, which the government can hardly afford to give up due to obvious political reasons.
This in turn will help the government to keep the fiscal deficit at the reduced level thus suiting its agenda of smoothly pushing forward the process of fiscal consolidation. But the other key issue is: Can the ongoing buoyancy in revenue collection be sustained on long-term basis?

The officials in the Finance Ministry are quite optimistic that given the predominance of pro-growth policy initiatives being adopted by the government at macro-economic level the buoyancy in revenue collection will be maintained.

As the Revenue Secretary Sunil Mitra says with sound growth-oriented macro-economic policies in place the government is quite optimistic of rising buoyancy in revenue collection.

With the introduction of proposed tax reforms in both Direct and Indirect tax through new tax regimes will boost buoyancy of revenue collection, he says.

On the direct tax front the government proposes to implement new Direct Tax Code (DTC), which seeks to replace the archaic Income Tax Act, 1961, with effect from April One, 2012. On the indirect tax front the government is moving ahead with introduction of Goods and Services Tax (GST), which seeks to subsume Excise duty and Service Tax at the central level and Value Added Tax (VAT) and other local levies at the state level. The Finance Ministry is of the view that introduction of GST-touted as the biggest ever tax reform in the indirect tax front-will boost overall revenue collection.

But economists caution that buoyancy in revenue collection will largely depend on maintaining high GDP growth rate in the range of 9 to 10 per cent on a sustainable basis. The sustainability of high GDP growth level will depend on both external factors like overall state of global economy as well as movement of global crude oil.
Similarly the sustainability of high GDP growth level will depend on key domestic factors like pursuance of fiscal consolidation through expenditure reforms, keeping inflation at tolerable level of 4 to 5 per cent and persisting with pro-reform macro-economic policies.

Thus sustaining the current phenomenon of buoyancy in revenue collection is, no doubt, a challenging job.