Surge in Direct Tax Collections

In News

• Recently, India’s net direct tax collections have crossed 7 lakh crores so far this year which is 23.33% higher than the same period last year signalling a clear post-pandemic rebound in the economy. 

What is Direct Tax?

• Direct tax is paid by a person or an organisation responsible for paying tax directly to the entity that imposed it.
• An individual taxpayer, for example, pays direct taxes to the government for various purposes, including income tax, real property tax, personal property tax, or taxes on assets.

What is Tax Buoyancy?

• Tax buoyancy explains this relationship between the changes in government’s tax revenue growth and the changes in GDP. 
• It refers to the responsiveness of tax revenue growth to changes in GDP. 
• When a tax is buoyant, its revenue increases without increasing the tax rate.
• There is a strong connection between the government’s tax revenue earnings and economic growth. 

• The simple fact is that as the economy achieves faster growth, the tax revenue of the government also goes up.

Factors responsible in rise in tax collection 

• It is the result of the stable policies of the Government focusing on simplification and streamlining of processes and plugging of tax leakage through effective use of technology. 
• There has been a remarkable increase in the speed of processing of income tax returns filed during the current financial year.
• GST collection increased 28 per cent year-on-year to Rs 1.43 trillion on better compliance, revival in consumption, and elevated inflation.

• The level of economic recovery can also be seen from the value of e-way bills generated which has improved from 16.9 lakh crore in 2021 to 25.7 lakh crore in 2022.

• Corporate tax as of now is growing about 25-26 per cent.
• The IT department has successfully used technology to reach out to assesses in non-intrusive ways; for instance, sending email reminding them to file return if not already. 
• Intensive and extensive use of data analytics and artificial intelligence has prompted assessments to report people’s income accurately. 

Benefits of Tax Buoyancy

• Government being the beneficiary: The government can feel relieved and happy if the economy achieves higher growth. The biggest beneficiary of a higher GDP growth rate is the government itself.
• No need to borrow: The government may not borrow highly to finance the budget
• Welfare measures: New schemes and programmes can be lavished because of high revenue growth.
• GDP growth: If the GDP growth rate registers high, direct income tax collection will accelerate. Generally, direct taxes are more sensitive to GDP growth rate.

Way Forward

• It is a clear indicator of the revival of economic activity post pandemic.
• It reflects the healthier balance sheets and growing profitability as it recovered from the pandemic-induced slowdown.
• The Centre is counting primarily on healthy direct and indirect tax collection this year to maintain its FY23 fiscal deficit target of 6.4 per cent of GDP at a time when its subsidy and welfare spending commitments have increased due to inflationary pressures and supply-chain disruptions caused by the war in Europe.  

Source: TH