One of the points that the Modi government has tried to highlight as its success is the increase in direct tax collections. And some recently released data suggested the same. Direct taxes comprise of corporate tax, personal income tax and other direct taxes. Take a look at the graphic that plots the direct tax-to-GDP ratio. According to it, the direct tax-to-GDP ratio for FY2017/2018 stood at 5.98 per cent of the GDP against 5.57 per cent in 2016/2017.
Not surprisingly, it is being claimed as a success by the government. But if we look at the data a little more closely, we might be jumping the gun here. The last time such a huge jump happened was between 2006/2007 and 2007/2008. In 2006/2007, the direct tax-to-GDP ratio was 5.36 per cent and the very next year it jumped to 6.3 per cent. During the same period, the personal income tax-to-GDP ratio jumped from 1.99 per cent of the GDP to 2.41 per cent. In 2008/2009, the personal income tax-to-GDP ratio was down to 2.13 per cent. After that, it kept falling and reached 1.89 per cent in 2011/2012. In fact, the personal income tax-to-GDP ratio in 2003/2004 was at just 1.5 per cent of the GDP. From there, it had jumped to 2.41 per cent by 2007/2008.
Between 2004 and 2008, the stock market was on fire. Given that, a good explanation for the jump is the fact that investors were trading more and in the process, ended up paying higher short-term capital gains (STCG) tax on equity. Back then, an STCG tax of 10 per cent had to be paid on selling shares within a year of buying. Currently, it stands at 15 per cent. At the time, there was a property boom as well. However, the government does not give a total break-up of different kinds of personal income tax that it collects.
A similar sort of explanation can be offered for the recent jump in the direct tax-to-GDP ratio. The stock market has gone from strength to strength between 2014 and 2017. In the process, the personal income tax-to-GDP ratio has jumped from 2.12 per cent in 2014/2015 to 2.5 per cent of the GDP in 2017/2018. The corporate tax-to-GDP ratio is more or less the same, dropping a bit from 3.42 per cent to 3.41 per cent.
Hence, this jump in the direct taxes-to-GDP ratio may have taken place because the stock market is doing well, people are trading more and consequently, paying higher STCG taxes on shares.
Whether there has been a genuine jump in direct tax collection or whether this is just a blip in the long term, will only become clear in the years to come.