Exploring the factors behind India’s decadal high tax revenue collections

The direct tax-to-GDP ratio is expected to reach a high of 6.5% in fiscal year 2023-24. In terms of overall tax revenue including indirect taxes, the gross tax revenue, currently standing at 11.6% of GDP in FY24, is on track to achieve a 16-year high. The projections for FY25 also indicate a surge to the highest levels witnessed in the past two decades.

Experts attribute the majority of the boost in the direct tax-to-GDP ratio to the growth in income tax collections rather than corporate tax collections. Personal income tax collections witnessed robust growth, with a 20% increase in FY23 and a substantial 29.4% in FY24 (till November). In contrast, corporation tax collections experienced growth rates of 16% and 20.1% during the same period.

Let’s delve deeper into the surge in the direct tax collection.

Anubhuti Sahay, Head of South Asia Economics Research at Standard Chartered Bank, attributes this achievement to the increase in personal income levels, particularly in the higher income group, and a boost to corporate sector profitability amid low commodity prices.

“The effective use of technology, especially since 2021, has enhanced transparency around various sources of income generated both by individuals and by corporates. The deployment of information from GSTN has also helped to track and tax income better,” adds Sahay.

Devendra Kumar Pant, Chief Economist & Head of Public Finance at India Ratings & Research, also agrees with higher corporate profitability, owing to subdued input price rise. “The increased monitoring and compliance, and the expansion of formalisation of the economy have also helped,” says Pant.

Deepak Agrawal, CIO & Fund Manager of Debt at Kotak Mutual Fund, notes that from April to November 2023, direct taxes have grown at a healthy rate of 25% over the previous year, much higher than the budget target of 10.5%. “This is underpinned by strong growth in both corporation and income tax collections owing possibly to higher incomes (particularly capital gains), margin expansion-driven gains in corporate earnings, and increased compliance,” says Agrawal.

Jiger Saiya, Partner & Leader of Tax & Regulatory Services at MSKA & Associates - a member firm of BDO International, points out that the number of taxpayers has increased from about 87 million to 93.7 million. “Interestingly, at Rs.8.33 lakh crore, Personal tax collections have outnumbered corporate tax collections in FY23, which were around Rs.8.25 lakh crore.

“The personal taxes are contributing significantly to growth in overall tax revenues. The growth in direct tax collections has exceeded that in Indirect taxes,” says Saiya.

Saiya cites key reasons for this growth, including a strong economic recovery post-COVID, changes in the tax framework focusing on lowering tax rates and increasing compliance, strengthening tax administration with the help of risk-based assessments, and deployment of technology.

Santanu Agarwal, Deputy Managing Director of Paisalo Digital Limited, mentions that a crucial aspect contributing to the heightened ratio is the deliberate expansion of the tax base, bringing previously untaxed sectors into the formal economy. “This strategy has proven successful in enhancing revenue collection. In addition, India's economic recovery post-pandemic has been instrumental. As businesses regain their footing, corporate profitability improves, thereby expanding the taxable income base,” he says.

So, what’s the outlook ahead?

“While year-on-year growth in direct taxes is likely to slow in FY25 amid moderating GDP growth and the plateauing effect of low commodity prices, the improvement in the direct tax-to-GDP ratio is likely to remain a permanent fiscal buffer,” says Sahay.