As I mentioned in the preceding post, a narrative of “tax terrorism” is being built strongly on social media, against the incumbent regime. Many popular influencers are repeatedly alleging that the government is squeezing the middle classes too hard through “exorbitant” direct and indirect taxes. Numerous experts have opined that the high taxes are the primary reason for the decline in growth trajectory, especially the private consumption. The followers of these experts are quick to lament that poor infrastructure and civic amenities are totally incongruent with the current structures of direct and indirect taxation.
There is absolutely no denying that regardless of the official claims, the civic infrastructure in most parts of the country remains of poor quality and inadequate. The civic authorities are mostly inefficient, and wastage of resources rampant. Nonetheless, accusing the current regime of coercive taxation policies may not be appropriate, in my view. The taxation structure has witnessed gradual changes in the past four decades. The process has continued notwithstanding the nature of the governing political establishment.
In the past four decades we have seen governments with overwhelming majority in the parliament (Rajiv Gandhi 1985 and Narendra Modi 2019), fragmented minority (V. P. Singh, H. D. Deve Goda, I. K. Gujral) and fragile coalition (A. B. Vajpayee, Manmohan Singh). Many of these governments had communists and socialists as key constituents. The taxation structure has however continued to evolve, mostly in line with the recommendations made in 1993 by the Raja Chelliah Committee. There have been only a few ad hoc measures, like exemption of long-term capital gains on some listed securities (2004) and dividend (1997) from payment of tax, to stimulate higher growth.
Marginal rise in tax revenue during 2014-2024
Past decade has seen only a marginal rise in the overall tax revenue for the central government. Most of this rise in tax collection could be attributed to the implementation of a nationwide Goods and Services Tax (GST) which has resulted in wider coverage of taxpayers and better compliance. Improvement in digital infrastructure of tax departments has also resulted in better surveillance and compliance.
· In the past decade (FY14-FY24), nominal GDP of India has grown at 10.1% CAGR. In this period, total tax revenue of the central government has grown at 11.5% CAGR.
· However, most of this tax buoyancy occurred in FY17-FY19 (GST implementation period). During the past five years (FY20-FY24), nominal GDP has grown at 9.3% CAGR, while the tax revenue of the central government has grown at a lower 8.9% CAGR.
· During FY15-FY24, average income tax per individual tax payer (including HUF assessees) has grown at 7.8% CAGR, much less than the rise in per capita income of 11% CAGR.
No material changes in the taxation matrices during FY20-FY24
Total tax revenue of the central government witnessed a jump (from 10.3% of GDP to 11.9%) during FY15-FY19 period. Most of this jump could be attributed to the implementation of GST, which led to transfer of some part of State levies by the central government.
· During FY15-FY19 period, indirect taxes collected by the central government grew from 4.7% of GDP to 5.6%. However, in the subsequent five years (FY20-FY24) these indirect taxes have declined to 5.2% of GDP, signifying efficiencies due to single nation-wide tax.
· Much talked about Securities Transaction Tax (STT) has grown from 0.47% of total tax revenue to 0.93% during FY14 to FY24. This has added to the cost of transaction; though much of this rise may have been mitigated by the fall in brokerage charges.
During the decade of FY15-FY24, total direct taxpayers increased from 5.26 crores to 10.41 crores. A significant part of this rise in the number of taxpayers could also be attributed to GST, which brought lots of smaller (unorganized and/or non-corporate) businesses into the tax net. Material improvement in the digital infrastructure and surveillance system of the tax department in the past decade have also led to better compliance.
· Direct tax collections grew from 5.6% of GDP in FY14 to 6.3% of GDP in FY19. However, since FY19, it has grown only marginally to 6.5% of GDP in FY24.
· Personal income tax collection has risen from 37.4% in FY14 to 51.8% in FY24. A large part of this collection could be attributed to non-corporate business income, which is taxed as personal income in the hands of proprietors of the small businesses. Many of these individuals have come into the tax net, post implementation of GST.
No free food at taxpayers’ expense
The popular narrative is that the government is spending taxpayers’ money to provide free food to 800 million people to lure them to vote for it. This may not be true. The subsidy bill of the central government has been reduced from 14% of GDP in FY14 to just 2% of GDP in FY24.
The food security subsidy in India has actually reduced from 1.1% of GDP (Rs1250bn) in FY14 to 0.7% of GDP (Rs2123bn) in FY24.
I am not writing this to support or oppose any government or political party. I just want to put the record straight and avoid getting carried by the narrative being built on social media.
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