Fiscal year 2023–2024 is predicted to have a peak of 6.5% for the direct tax-to-GDP ratio. With respect to total tax income, which encompasses indirect taxes as well, the gross tax collection is expected to reach a 16-year high in FY24, with its present position at 11.6% of GDP. According to the estimates, FY25 will see a rise to levels not seen in the previous 20 years.
Experts believe that income tax collections, not corporate tax collections, are primarily responsible for the increase in the direct tax-to-GDP ratio. Revenue from personal income taxes increased significantly, rising by 20% in FY23 and a significant 29.4% in FY24 (through November). In comparison, during the same period, company tax collections grew at rates of 16.1% and 20.1%.
Let's examine the increase in direct tax revenue in more detail:
This accomplishment, according to Anubhuti Sahay, Head of South Asia Economics Research at Standard Chartered Bank, is a result of rising personal income levels, especially for the higher income bracket, and increased corporate sector profitability in the context of reduced commodity prices.
Since 2021, the efficient application of technology has improved transparency regarding the several revenue streams that corporations and people create. Better tracking and taxation of income has also been made possible by the use of GSTN data, says Sahay.
Devendra Kumar Pant, Chief Economist and Head of Public Finance at India Ratings & Research, concurs that lower input price increases have contributed to increased company profitability. According to Pant, "the expansion of the formalization of the economy and the increased monitoring and compliance have also helped."
According to Deepak Agrawal, CIO and fund manager of debt at Kotak Mutual Fund, direct taxes increased by a healthy 25% between April and November 2023 compared to the same period the previous year, which is far more than the budgeted 10.5% growth rate. According to Agrawal, "strong growth in both corporation and income tax collections is the foundation for this, possibly due to higher incomes (particularly capital gains), gains in corporate earnings driven by margin expansion, and increased compliance."
Furthermore, as per Jiger Saiya, Partner & Leader of Tax & Regulatory Services at MSKA & Associates, a BDO International member company, there are now 93.7 million taxpayers worldwide, up from roughly 87 million in the previous year. It's interesting to note that, in FY23, personal tax revenues exceeded corporate tax receipts, which were around Rs. 8.25 lakh crore, at Rs. 8.33 lakh crore.
"The growth in total tax receipts is mostly being attributed to the personal taxes. Saiya states that the growth in direct tax revenues has outpaced the growth in indirect tax collections.
Saiya lists several important factors contributing to this expansion, such as the robust post-COVID economic rebound, modifications to the tax code that emphasize reducing tax rates and boosting compliance, bolstering tax administration through risk-based assessments, and technological advancements.
A significant factor in the elevated ratio, according to Paisalo Digital Limited's deputy managing director Santanu Agarwal, is the intentional broadening of the tax base to include hitherto untaxed segments of the economy. "This tactic has improved money collection and shown to be effective. Furthermore, India's post-pandemic economic recovery has been crucial. Corporate profitability increases as companies get back on their feet, which broadens the basis of taxable revenue, the speaker claims.
"The improvement in the direct tax-to-GDP ratio is likely to remain a permanent fiscal buffer, even though year-over-year growth in direct taxes is likely to slow in FY25 amid moderating GDP growth and the plateauing effect of low commodity prices," notes Sahay.
