Direct tax buoyancy again falls sub-2% in 2022-23

The direct tax buoyancy had risen to a 19-year high of 2.5 per cent in 2021-22 but it again fell to 1.1 per cent the next year. This means that though the direct tax growth was a bit over than gross domestic product (GDP) growth rate, it was nowhere more than double the rate at which the economy expanded in 2023-23.

The Central Board of Direct Taxes (CBDT) gave various aspects of direct taxes recently since 2000-01, but those were till 2021-22. This exercise can be extended till 2022-23 to understand how the year performed in terms of tax buoyancy and tax-GDP ratio. It should be noted that direct tax collection figures are still provisional and GDP figures are on the basis of second advance estimates for 2022-23. The actual figures may change the outcome slightly.

While the GDP expanded 15.9 per cent in the year, the direct tax collections could grow just 17.6 per cent. For the tax buoyancy to stand at 2.5 per cent, the tax rate ought to have expanded by almost 40 per cent.

This means there are still some gaps in tax collections that ought to be filled. In the past 23 years, tax buoyancy stood at over two per cent in just six years. These include four years of the National Democratic Alliance (NDA) regime -- 2000-01, 2002-03, 2003-04 of the Vajpayee government and 2021-22 of the Modi government. Other than this, two years of the United Progressive Alliance (UPA) government -- 2006-07 and 2007-08 -- saw tax buoyancy of over two per cent.

It is not always that only high GDP growth years have given high tax buoyancy. In fact, three years of the Vajpayee government did not see very high GDP growth rates, yet produced tax buoyancy of over two per cent. GDP growth rates at current prices were just 7.7 per cent in 2000-01, 7.8 per cent in 2002-03 and 12.06 per cent in 2003-04. However, 2021-22 saw the GDP growth rate at 19.5 per cent, largely on a low base of contraction of the economy in the base year due to the first wave of Covid-19-induced lockdowns.

The UPA years of 2006-07 and 2007-08 were comparatively high growth periods of over 16 per cent. Another high growth year of 2010-11 which yielded 18.8 per cent GDP growth rate, could not fetch much direct tax growth rate comparatively. The tax buoyancy was less than one per cent as the direct tax growth rate was almost 18 per cent that year.

The following year also saw a high growth rate of 17.4 per cent but the direct tax collection growth rate was smaller. Tax buoyancy was again less than one per cent in 2011-12 as the direct tax growth rate was just 10.8 per cent.

There was one year since the turn of the century when the direct tax collections fell despite GDP growth rate. That happened in 2019-20 when GDP grew by 6.3 per cent at current prices, but direct tax collections declined  7.6 per cent. This amply provides evidence to what economists say that the Indian economy started slowing down even before Covid struck at 2020-21.

The impact of  a slowdown was felt mainly on corporate tax collections which fell almost 16 per cent at Rs 5.57 trillion in 2019-20 year-on-year. Personal income tax collections also grew just 4.2 per cent at Rs 4.97 trillion that year.

It is not always true that the years of high direct tax-GDP ratio have given high buoyancy. For instance, the direct tax-GDP ratio stood at 6.10 per cent in 2022-23 against 5.97 per cent in the previous year. Yet the buoyancy factor was more than double in 2021-22 than in 2022-23.

The other two years of over six per cent direct tax-GDP ratio -- 2007-08 and 2018-19 have different stories to tell. While buoyancy was just 2.27 per cent in 2007-08, it was just 1.29 per cent in 2018-19.

Direct tax collections grew by 160.17 per cent from Rs 6.4 trillion in 2013-14, the last year of the UPA government to Rs 16.6 trillion 2022-23. These collections had expanded by 431.92 per cent during the comparative period of the UPA government (2003-04 to 2012-13). However, the growth rate of absolute numbers of taxes is not the correct yardstick to compare the two regimes. It is the direct tax buoyancy factor that gives the correct picture among other parameters.