Little context is needed for an article on tax collection with the presentation of the pre-election Union Budget just three days away.
Yet, the two proximate triggers to write this are the release of the latest data on tax collection for the year 2022-23 by the central board of direct taxation (CBDT), and the statement of the prime minister (PM) reported in the media four days back which is extracted below for reference.
The PM’s reference to the ‘Ram Rajya’ is, without doubt, to the period since fiscal year 2014-15 when the present regime took office for the first time. His emphasis on the success of the policies of the government on the fiscal front is a good impetus to unfurl some relevant data.
The tax-GDP ratio is a key indicator in many ways and the CBDT’s latest release highlighted that the collections have reached a 15-year high in fiscal year (FY)22-23.
The data for the Ram Rajya period is seen in two parts, to represent its two tenures; the first one from FY14-15 to FY18-19, and the current one since FY19-20 which is soon to conclude.
For the purpose of the analysis, the tax-GDP data reckons not only the taxes collected by the Union government, but also the taxes collected by the states and the Union Territories (UTs).
When the CBDT mentioned that the ratio has reached a 15-year peak, it referred only to the taxes collected by the Union and excluded the figures for the states.
There is little to fault in this as, conventionally, the data has been looked at independently and most discussion on tax buoyancy confined it to the figures for the Union.
However, the analysis excluding the states’ taxes would only convey a part of the story and also make international comparisons difficult.
The table below displays the figures for the latest period of four years for which the actual data is available. The data for FY23-24 may be provisionally available when the Budget is presented but the final data may take another year. But its absence does not vitiate this exercise.
When the data is seen in totality, it actually presents a slightly different picture in as much as fiscal year 2021-22 has a higher tax-GDP ratio than the latest year of 2022-23 which the CBDT data declared as the best. The reason is that the CBDT has focus on the direct tax collections and direct taxes in 2022-23 have inched higher than the preceding years.
The next table shows that even in 2017-18 the tax-GDP ratio was almost equivalent to the figure for 2021-22, the highest in the nine-year period. The ratio has actually been oscillating in the range of about 17.50% over these years and, within this period, it is difficult to infer a structural shift.
Among the components of the taxes collected, corporate tax and income-tax (I-T) represent taxes paid by the richer segment of the population. The behaviour of this is critical for achieving the long-term goal of a healthy tax-GDP ratio.
The annual GDP growth in the period 2014 to 2023 is 10.2% and the corresponding figure for corporate tax is 8.5%. This is a clear case of not enough contributions from the corporate sector which has actually been growing faster than the overall GDP growth.
Another aspect to reckon in this discussion is that the period post-2014-15 witnessed significant levies on petroleum products through special cesses. These levies effectively prevented the benign international prices benefiting the consumers. In understanding the tax-GDP ratio of this period, this factor has significance.
The PM’s statement on Ram Rajya alluded to major tax reforms implemented during this 10-year period leading to better collection and compliance.
A watershed change is the introduction of goods and services tax (GST) in July 2017. Strangely, the highest indirect tax collection happened in the year preceding the introduction of GST and the subsequent years have failed to surpass that.
There is some level of empirical data to show that the collections did not improve with GST and this has been explained with data in some of the previous articles. This may sound counter-intuitive, as the monthly GST collections have been a matter of much chest thumping!
Looking at the data for India in isolation may not show the full picture and a comparative chart of a few other countries in the table below would supply a better perspective on the criticality of tax-GDP ratio for economic development.
Social security contributions, which entitle citizens to committed benefits in old age and medical care by the government, are a significant part of the tax structure in most countries compared. The structure obtained here on contributions to retirement funds may be quite different and individual-specific.
The importance of a high tax-GDP ratio, with a higher contribution by direct taxes for equitable development, cannot be overemphasised. The ever-increasing wealth and income inequality in the Indian context even in the Ram Rajya era should be duly acknowledged and form a key input into the fiscal policy formulation.
The past 10 years have contributed to this trend as much as the previous periods post-liberalisation in the 1980s as shown in the graph on the left. How much did the tide lift the boats of the poorest is a moot question and the lack of credible data is a major constraint to having a clear view of this.
A view expressed denying the growing wealth and income disparity can be that while the share of the rich may have disproportionately gone up, since the overall pie has increased due to the better policies in Ram Rajya, the poor are better off economically though with a lower overall share.
Does the tax policy of the Ram Rajya contrast greatly with the preceding decade?
Since Ram Rajya is only post 2014, what was the earlier period to be known as?
Terming it ‘Ravan Rajya’ may be an unsolicited insult to the king of the richest nation of its time as reported by Hanuman after a minute inspection of every nook of the city, with the unrivalled endowment of a private jet!
‘Rambo Rajya’ looked the best out of the many suggestions that came!
This period is also seen in two parts, the first being 2004-5 to 2008-9. This was admittedly better than the second period which initially encountered the global crisis and later, the stalling of the government’ business due to the court intervention in coal allocation and the spectrum debacle.
Corporate tax contributions are much higher and the tax-GDP ratio attained a peak in 2007-8, yet to be surpassed.
Even the later five-year period has healthy ratios despite the effect of the global crisis and other local political logjam. The ratio is maintained around 16.5% with corporate tax being consistently higher than the later periods (all-time highest being 2010-11).
When Ram and Rambo are in juxtaposition the contrast is quite catchy!
Aspects like the implications of the different policy initiatives like demonetisation and digitisation that was presumed to eradicate the black money and improve tax collections are sorely missing in the public discourse.
The pre-Budget discussions in the media are largely around the concessions that different constituencies seek. The Budget waxes eloquent on the minutiae and trivia of the schemes with sonorous titles. The post-Budget noise is all the cacophony inside the parliament!
When the 800mn (million) Indians who live on free rations go to vote, little would the tax-GDP ratio be on their minds.
A Tamil limerick runs- I don’t care whether Rama is the ruler or Ravana, I am the king of my own mind…!
Note: Any error or inconsistency noticed in the data used may be highlighted such that it is corrected duly.
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)