Rise in personal income tax collections encouraging, sustainability suspect

A recent press release on direct tax collections up to June 19 suggests a moderation in collections. Net collections are reported to be 1.39 per cent lower than those in the previous financial year, attributed to a decline in corporation tax collections. Is this a short-term fluctuation, or are there some other factors at play? Looking at the annual growth in revenue collections for the three major taxes, corporate income tax (CIT), non-corporation income tax (referred to as PIT) and central goods and services tax (CGST), there is a clear moderation in revenues from CIT and CGST. CIT growth fell from 15 per cent in 2022–23 to 8 per cent in 2024–25, and CGST from 21 per cent to 10 per cent during the same period. The performance of PIT has been comparatively better — 20 per cent and 17 per cent, respectively.

 

Quarterly tax-to-GDP ratios echo these differences. The chart shows the ratio of quarterly tax collections (as reported in the Controller General of Accounts’ monthly report) as a percentage of quarterly GDP estimates for the period since 2018-19. From this figure, it is clear that corporation tax collections are volatile, fluctuating around 3 per cent. The PIT shows a clear upward trend with some volatility or seasonal fluctuations. In comparison, revenues from Central GST show a modest increase, with a clear moderation in performance in the last few quarters. 

 

What can we read from these trends? The disproportionate improvement in PIT is a positive development, which needs to be understood. The major sources of income that constitute the base for income taxation are salaries, business income, and capital gains. The annual incomes reported in income-tax returns for assessment year 2023-24 — pertaining to financial year 2022-23 — suggest that salary incomes account for 53.9 per cent of total reported income, while business income accounts for 29.7 per cent. Although data for subsequent years is not available, it is important to understand possible trends in these two categories of income.

 

Available information on trends in wages and salaries from the WTW Salary Budget Planning Report suggests that salaries grew by 8.5 per cent in 2021, 9.8 per cent in 2022, 10 per cent 2023, and 9.5 per cent in 2024. The survey for 2025 suggests an average increase of 9.5 per cent. The increase in salaries as reported could partly account for the observed upward trends in PIT. If the expectations for growth in salaries for 2025 are realised, any risk to tax revenue performance would arise from moderation in growth of employment, which, in turn, would relate to growth in businesses. 

 

Turning to business income, one medium-term factor that needs to be considered is the impact of the introduction of GST. Two possible effects can be conceived of. First, the introduction of GST could have led to the formalisation of economic activity, resulting in improved revenue collections in income tax — this could be considered a level correction, as hitherto informal incomes now transition into the formal economy. Once the process is complete, the stimulus for high growth in revenue would taper off. Alternatively, higher growth in the economy could be a result of higher efficiency following the rationalisation of the tax structure. This should be reflected in improved GST collections alongside an improvement in PIT, even though the ratios of GST and PIT to GDP might not change much. Business income reported in income-tax returns by individuals and firms taken together has been increasing at about 12-13 per cent from AY 2021-22 to AY 2023-24, suggesting that trends in GST revenues and trends in business income are in line with each other and moderately higher than the nominal growth of GDP. In contrast, the tax-to-GDP ratio for CIT has shown a slight decline.  

 

Given these observations, sustained growth in PIT would depend on sustained expansion in taxable economic activity, one that generates employment to support salary income and contributes to business income as well. A few emerging challenges on this front are worth highlighting:

 

1. Uncertainties in the global economic environment persist, and even ratchet up periodically. American tariff conversations have created uncertainties in both the level of global demand and the potential restructuring of supply chains. In the short term, these changes can be disruptive, even if opportunities might emerge in the medium term. The recent conflict between Israel and Iran adds a fresh new dimension of uncertainty. Within the last week, we have moved from a state of heightened uncertainty to an uneasy lull. It is not clear whether the ceasefire will hold. Such a conflict, too, would have a significant impact on the Indian economy — the direct impact would play out through an increase in crude oil prices and a spillover into inflation.

 

2.  The Reserve Bank of India reduced the repo rate by 50 basis points and the cash reserve ratio by 100 basis points. It is hoped that these changes would encourage investment in the economy. Any change in the inflation prospects might nudge a rethink.

 

3. A significant number of policy initiatives have been put into place by both the Union and state governments. These include free food, health care, free electricity and free bus passes in some states. Further, a range of cash transfer schemes have been operationalised. With such initiatives, it is expected that available income could be used for other purposes, stimulating demand for a range of taxable goods and services. The steady pace of growth in GST revenues, however, does not provide evidence of such a stimulus. Further, if some of the schemes are reviewed and withdrawn in a few years, it can have a negative impact on revenues from GST—and, by implication, on income taxes through business incomes.

 

4. Finally, for the current financial year, the exemption threshold for individuals has been raised. Individuals with incomes between ₹7 lakh and ₹12 lakh would have no liability to pay income tax. Further, the divergence between liabilities under the old regime and the new regime has increased, implying a likely shift from the old to the new regime, resulting in a further reduction in income-tax collections from individuals.

 

In other words, a moderation in the growth of PIT appears imminent. 

 

 

The author is director, National Institute of Public Finance and Policy, New Delhi. The views are personal