Why is the pickup in growth not reflected in central government tax collections?
March, 28th 2016
Four reports on central government taxes brought out by the Comptroller and Auditor General of India in recent months bring out some interesting insights on how the pickup in the economy has impacted on tax collections. These studies which investigate the trends in direct and indirect tax collections in the five years between 2010-11 and 2014-15 show that different segments have registered very disparate trends influenced by government policies in different sectors.
The scenario seems to be especially unpromising in the case of direct taxes where the government seems to have erred by regularly making too optimistic projections in the budget estimates. What is even more disarming is that the government efforts to improve direct tax collections by reducing tax exemptions seems to have no substantial impact on collections with the ratio of direct collections to GDP going down in the period. In fact the evidence is that income tax collections were more buoyant than that of corporate taxes during this period.
The scenario on the indirect tax front is equally disturbing. Ratio of both central excise and customs collections to GDP has declined in recent years. One reason is the sharp increase in tax incentives to boost exports which has hurt customs collections. The only positive trends on the indirect tax front is the continued improvement of service tax collections which now account for close to a third of the total indirect taxes.
At the macro level the overall trends show that despite the pickup in growth in recent years the share of direct taxes in GDP has fluctuated and slipped from 5.7% in 2010-11 to 5.5% in 2014-15. In fact the share of direct taxes in gross tax collections has come down from 56.2% to 55.9% during the period. What is worrying is that the dip in share of direct taxes has happened despite the government’s efforts to reduce direct tax exemptions. In fact the reduction of tax exemptions had ensured that the share of revenue forgone from direct taxes even dipped by a third from 21% of the total direct tax revenue in 2010-11 to just 14.8% in 2014-15. The dip in the share of direct taxes was also despite the sharp increase in the number of assesses. In fact the data shows that while the number of corporate tax assesses went up from 3.76 lakh to 6.75 lakh that of non-corporate assesses went up from 332 lakh to 360 lakh during the period.
On the indirect tax front the numbers show that the share of indirect taxes in GDP slipped from 4.43% to 4.36% in the five years between 2010-11 and 2014-15. But despite this fall the share of indirect taxes in total tax collections of the central government has moved up marginally from 43.54% to 43.87% during the period.
But what is surprising is that the pickup in growth has had no impact on either excise duty or customs duty collections. While the ratio of excise duty collections to GDP came down by 0.26 percentage points to 1.51% in the five years till 2014-15 that of customs collections came down by 0.24 points to 1.5%. Consequently the share of excise duty collections in total indirect taxes went down from 38.9% to 34.6% while that of customs duty fell from 40% to 34% during the period.
The slippage in excise duty collections was despite the government efforts to increase the number of registered assesses from 3.5 lakh to 4.7 lakh during the five years. However it is seen that share of assesses who filed tax returns has only gone up from around 28% to 38% during the period. One reason for the lack of buoyancy in excise duty seems to be the excessive dependence on a few products. In fact the numbers show that that two products, namely petroleum and tobacco products, account for close to two third of the excise duty collections.
The numbers also show that the government’s efforts to reduce the revenue forgone on central excise receipts from 140% of the excise duty receipts to 98% of the total excise duty receipts during the last five years also did not help improve buoyancy of excise duty collections. However, in the case of customs duty the fall in the ratio of customs receipts to imports from 8.1% to 6.9% was mainly due to the sharp increase in the customs revenue forgone from 179% of the total customs receipts to 265% in the five year period in a bid to boost export trade. The numbers show that duty drawbacks and advance license schemes alone now account for more than half the customs revenue forgone.
Thus the only major tax that has shown some buoyancy in recent years is the service tax rate who base has been extended to cover the whole sector except for a few items on the negative list. Consequently the ratio of service tax to GDP has gone up from 0.91% 1.34% and its share in total indirect tax collections have gone up from 20.6% to 30.8% during the period. However, unlike excise duty the service tax seems to be substantially less skewed with telecommunications and general insurance, the two largest sources of services tax revenues, accounting for just a little more than one tenth of the total service tax collections.