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Trends in India's Tax Mix: An Evolving Story

THE POLICY LAB-39
FEBRUARY 13, 2024

By J B Mohapatra

SELDOM has it been that all but few parts of any union budget receive any level of bipartisan acceptance- both in the facts and figures presented or the broad inferences therefrom. Annexure 2 of the Receipt Budget containing the analysis of tax revenue receipts is one such document where the credibility of the data remains largely uncontested, the faith mostly borne on the credibility of the foundational data anchoring budget estimates (BE) and the revised estimates (RE) of any year, which coincidentally are never really off their marks vis-a-vis the actuals reported in subsequent years; and second, the regulatory provisions and practice of reporting government transactions on cash basis of accounts under the Government Accounting Rules, 1990 and whereby tax receipts are recognized as receipts which are actually received before the end of the financial year and no latitude allowed to recognize in the union's annual accounts any tax which has not been received before the end of the financial year.

That said, many features of Annexure 2 of Receipt Budget relating to tax revenues of the government in the Interim Budget 2024 have been rightly highlighted including (a) the highest ever direct and indirect tax collections as per actuals of FY 22-23 (b) even higher projected collection as per RE of FY 23-24 compared to actuals of FY 22-23 (c) 13% increased projection for direct and indirect taxes in BE 24-25 compared to RE 23-24 (d) 1% tax buoyancy in FY 22-23, 1.2% in FY 23-24 and 1.1% in FY 24-25. Remarkable as these statistics are, and testify to the strength and resilience of the union's tax systems and procedures, 2 other aspects also stand out, if one were to zoom out of the limited time series analysis for 2-3 years and attempt to decipher a larger trend over a loner time scale.

(a) The first of the 2 aspects is the composition of direct tax: indirect tax in the gross tax revenue since 2003-04 given in Table 1 below:

Table 1:

Year
Collection: Direct Tax (DT) Inclusive of Corporation Tax, Taxes on Income other than Corporation Tax (In Cr)
Collection: Indirect Tax (IndT) Inclusive of Customs, Union Excise Duties, Service Tax, GST (In Cr)
Ratio of DT: IndT
2003-04 (Actual)
1,09,949
1,47,294
42:58
2004-05 (Actual)
1,31,948
1,70,936
44:56
2005-06 (Actual)
1,58,585
1,99,348
44:56
2006-07 (Actual)
2,19,411
2,41,538
48:52
2007-08 (Actual)
2.92,555
2,79,031
51:49
2008-09 (Actual)
3,19,441
2,69,433
54:46
2009-10 (Actual)
3,67,200
2,44,727
60:40
2010-11 (Actual)
4,37,757
3,44,530
56:44
2011-12 (Actual)
4,87,301
3,91,738
55:45
2012-13 (Actual)
5,52,838
4,73,792
54:46
2013-14 (Actual)
6,32,495
4,94,018
56:44
2014-15 (Actual)
6,87,251
5,44,113
56:44
2015-16 (Actual)
7,40,856
7,09,825
51:49
2016-17 (Actual)
8,34,360
8,61,625
49:51
2017-18 (Actual)
9,91,082
7,94,653
55:45
2018-19 (Actual)
11,36,555
9,37,321
55:45
2019-20 (Actual)
10,49,469
9,53,512
52:48
2020-21 (Actual)
9,44,858
10,74,809
47:53
2021-22 (Actual)
14,08,275
12,89,662
52:48
2022-23 (Actual)
16,59,067
13,81,935
55:45
2023-24 (RE)
19,45,000
14,79,380
57:43
2024-25 (BE)
21,98,830
16,17,840
58:42

While there are differing views on how best a country can leverage its tax policies to arrive at its most optimal tax mix [(a)Schwellnus and Arnold (2008) building up their theory how direct taxes reduce productivity and investment at firm level in the EU countries (b) Tanchev (2016) in the context of Bulgaria's tax policy finding proportional relationship between the progressive direct taxation structure and economic growth and (c) Ahmad (2016) exploring the long and short term relation between Pakistan's tax revenues and economic growth and advocating a reversal of the current tax mix where indirect tax contributes 63% of the gross tax revenue], it has been widely accepted in any technical literature on the direct tax: indirect tax composition ratio, that the numerator holds the primacy and moves upwards relatively faster among the developed economies, while the denominator in the given ratio is the more impactful among the less developed or developing economies. In India's context, the transit of direct tax: indirect tax ratio from 42:58 in 2003-04 to 58:42 in 2024-25 is unmissably a classic about-turn and seemingly an irreversible trend going forward. While fiscal policies do contribute to the desired structural trend in the tax mix that best suits the government and people the governments serve, no less significant in India's case, which now is progressively emphasizing on direct taxes to raise its tax revenue, are factors such as digital transition, spread and advancement of education, reforms across health and infrastructure, progressive social spending, efficient delivery of public good, and finally a level of sophistication reached at crafting tax legislation and enforcement of complex direct tax laws. In the context of other countries' experience of transiting in development matrix, the factors aforesaid are both the cause of why direct taxes have gained increased prominence in tax collection in India and its consequences.

(b) The second of the 2 aspects relating to tax revenue reported in the interim budget 24-25 is captured in table 2 below, and refer to the corporation tax: taxes on income other than corporation tax ratio over the same time-scale from 2003-04 to 2024-25:

Table 2:

Year
Corporation Tax (CT) (In Cr)
Taxes on Income other than Corporation Tax (IT) (In Cr)
Ratio of CT:IT
2003-04 (Actual)
63,562
41,387
61:39
2004-05 (Actual)
82,860
49,268
63:37
2005-06 (Actual)
1,01,277
57,308
64:36
2006-07 (Actual)
1,44,318
75,093
66:34
2007-08 (Actual)
1,92,911
1,02,644
65:35
2008-09 (Actual)
2,13,395
1,06,046
67:33
2009-10 (Actual)
2,44,725
1,22,475
67:33
2010-11 (Actual)
2,98,688
1,39,069
68:32
2011-12 (Actual)
3,22,816
1,64,485
66:34
2012-13 (Actual)
3,56,326
1,96,512
64:36
2013-14 (Actual)
3,94,678
2,37,817
62:38
2014-15 (Actual)
4,28,925
2,58,326
62:38
2015-16 (Actual)
4,53,228
2,87,628
61:39
2016-17 (Actual)
4,84,924
3,49,436
58:42
2017-18 (Actual)
5,71,202
4,19,880
58:42
2018-19 (Actual)
6,63,572
4,72,983
58:42
2019-20 (Actual)
5,56,876
4,92,593
53:47
2020-21 (Actual)
4,57,719
4,87,139
48:52
2021-22 (Actual)
7,12,037
6,96,238
51:49
2022-23 (Actual)
8,25,834
8,32,233
50:50
2023-24 (RE)
9,22,675
10,22,325
47:53
2024-25 (BE)
10,42,830
11,56,000
47:53

More or less across jurisdictions, corporation tax base remains comparatively narrow as against non-corporates. In India too, only 9.64 lakhs out of 6.73 cr of all ITR filers (1.4%) for FY 18-19, 9.33 lakhs out of 6.79 cr (1.4%) for FY 19-20, 10.24 lakhs of 7.39 cr (1.4%) for FY 20-21, 10.59 lakhs out of 7.30 cr (1.5%) for FY 21-22, and 10.88 lakhs out of 7.78 cr (1.4%) for FY 22-23 are corporate ITR filers. Positive turnaround in taxes on income other than corporation tax appears primarily driven by increase in absolute number of ITR filers who are not corporates rather than depressing the corporation tax collection numbers by any design. In fact, taxes foregone in favor of corporates (sometimes known as tax expenditure in budget documents) qua taxes foregone in respect of entities other than corporates have dramatically declined- from more than twice the amount foregone in respect of individuals in 2005-06 to just its half in 2020-21. Two, the average effective tax rate for corporates has actually increased, despite the newer provisions such as section 115BAA or 115BAB, from 19.26% in FY 2005-06 to 22.20% in FY 20-21. It is safe to conclude that relative growth in absolute number of all ITR filers (from 3.79 cr in FY 13-14 to 7.78 cr in FY 22-23 reflecting a 200% increase) versus growth in number of corporate ITR filers (from 7.15 lakhs in 2013-14 to 10.88 lakhs in FY22-23 or increase of 150%) contributed more to the growth in collection of taxes on income other than corporation tax than any other.

Whatever be the principal drivers for shifting the emphasis within direct taxes to taxes on income other than corporation tax, be they better legislation, rationalization of tax rates or deductions or exemptions, greater innovation in devising trade-offs for taxpayers, or efficient enforcement, in general, contribution of corporate income tax to gross direct tax revenues across developing and less developed economies is much higher compared to developed economies. Contribution of corporate income tax in gross tax revenue is 5.6% in France, 7.9% in UK and 6% in USA, whereas it is 66% in Malaysia and 52% in Indonesia. In that context, taxes on income other than corporation tax outrunning the corporation tax in India as projected in the RE for FY 23-24 should mark as a seminal departure in union government's tax revenue growth records, and a statement of greater faith in less complex and less distortive taxes on income other than corporation tax against more complex and risky corporate tax.


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