In a significant shift in the Indian tax landscape, personal income tax has now become the largest revenue contributor for the Indian government, surpassing both corporate tax and the Goods and Services Tax (GST). According to recent reports, while GST, corporate tax, and personal income tax each account for nearly 30 per cent of the gross tax collection, their growth trajectories have diverged markedly since FY19.
Growth Trends of Major Taxes
The corporate tax growth rate has been the slowest and most volatile among the major taxes, primarily due to a sharp reduction in corporate tax rates. Despite a notable increase in corporate earnings in FY24, corporate tax growth remained modest. This contrasts with the robust growth observed in personal income tax and GST collections, highlighting a complex relationship between corporate profits and tax revenues that merits closer scrutiny.
On the other hand, personal income tax has seen the fastest growth rate, overtaking corporate tax as the government’s largest revenue source. The steady growth of GST collections since its implementation culminated in it surpassing corporate tax collections from FY23 onwards.
Effective Tax Administration and Compliance
The impressive growth rates in income tax and GST collections in FY24 occurred despite challenges such as low private consumption growth and declining inflation. These trends indicate a strong compliance environment and effective tax administration, which have contributed to higher revenue collections.
Projected Tax Buoyancy and Economic Growth
Looking forward, the report projects an increase in tax buoyancy, which has averaged close to one over the past five years. Several factors contribute to this optimistic projection, including India’s robust GDP growth, estimated at 11-12 per cent nominally. The overall gross tax collection is anticipated to record a compound annual growth rate (CAGR) of 13-15 per cent, with an expected 11 per cent increase in FY25. This positive outlook is underpinned by a stable indirect tax structure under GST and a resilient economic environment.
Non-Tax Revenue and Fiscal Transfers
Non-tax revenue has also seen a significant boost, primarily due to increased profit transfers from the Reserve Bank of India (RBI). With USD 650 billion in forex reserves and high US yields, this trend is expected to continue. Additionally, the ratio of transfers to states to gross tax revenue is likely to remain around 32 per cent, ensuring a balanced fiscal approach.
Strategic Focus on Capital Expenditure
There has been a notable shift in the share of capital spending, with the revenue-to-capital expenditure ratio improving from an average of 87 per cent:13 per cent during FY14-FY21 to 79 per cent:21 per cent in FY24. This ratio is projected to further improve to 77 per cent:23 per cent in FY25, with the CAGR in capital spending more than doubling the 12 per cent growth in revenue spending since FY19. This shift indicates a strategic focus on long-term investments and infrastructure development.
Balanced Approach to Economic and Social Development
Revenue spending is expected to grow by 6 per cent in FY25, while capital spending is projected to increase by 17 per cent. Despite the slower growth in revenue spending, there is an anticipated acceleration compared to FY24. This balanced approach aims to sustain economic momentum while ensuring fiscal prudence.
Welfare Expenses and Debt Servicing
The report also highlights a rise in welfare expenses. Spending on food subsidies and rural development is likely to increase to support rural India and boost consumption. Debt servicing costs are also expected to grow substantially, reflecting the government’s commitment to managing its fiscal responsibilities while addressing social welfare needs.
In summary, the evolving trends in India’s tax revenue composition highlight the growing significance of personal income tax as the largest revenue source. This shift, coupled with effective tax administration and strategic fiscal planning, positions India for sustained economic growth and development.
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