Tax mop-up: the back story and the year ahead

As of 10 February, the net collection of direct tax has increased by 20.25% and stood at  ₹15.6 trillion. (Photo: Mint)
As of 10 February, the net collection of direct tax has increased by 20.25% and stood at 15.6 trillion. (Photo: Mint)

Summary

  • The government expects buoyancy in direct tax collection to continue.

Net direct tax collection has surged 20%, led by a sharp increase in personal income tax payments. This has helped the government reduce borrowings and speed up fiscal consolidation. Mint looks at what catalysed the mop-up, its benefits and the outlook for next year.

How sharply has tax collection risen?

As of 10 February, the net collection of direct tax (after adjusting for refunds) has increased by 20.25% and stood at 15.6 trillion. This is already 80% of the revised budget estimate of 19.5 trillion with two months still left to go in the financial year 2024. The earlier budget estimate was for 18.23 trillion. This increase was fuelled by personal income tax payments which grew by around 27%. Corporate income tax also registered a growth of 13.6%. As a percentage of GDP, direct tax collection in FY24 is estimated at 6.6% which is significantly higher than 6.1% in FY23 and 4.8% in FY21.

What has catalysed this increase?

Firstly, the tax base has grown, made possible by the greater formalization of the economy. Better compliance has been triggered by the use of technology in tax administration. According to the Press Information Bureau, a record 81.8 million income tax returns (ITR) had been filed for assessment year 2023-24 as of 1 January, 2024. In fact, ITRs filed by individual taxpayers have increased 90% in the last nine years. The government has also expanded the scope of tax collected at source. Finally, economic growth has boosted corporate profits and made for higher corporate tax collection.

How does this help the country?

Higher direct tax collection has boosted government revenue. This, along with some expenditure trimming, has enabled it to reduce the FY24 fiscal deficit to 5.8% as against 5.9% originally budgeted, setting the stage for faster fiscal consolidation. Higher revenue has also helped it cut its borrowing requirement for FY24 from 17.86 trillion to 17.34 trillion.

 

What’s the outlook for the next year?

The government expects buoyancy in direct tax collection to continue. It has pegged direct tax collection in FY25 at 6.7% of GDP, which, according to experts, is the highest since the late 1980s. It is this confidence that has also emboldened the government to announce a lower gross borrowing of 14.13 trillion from the market for FY25 as against 15.43 trillion budgeted for FY24 and to target a fiscal deficit of 5.1% of GDP for FY25, which is significantly lower than 5.3% levels that the market had expected.

What does this mean for the economy?

Higher revenue means less government borrowing. Its lower gross borrowing in FY25 compared to FY24 would allow more room for the private sector to borrow from the market and this can crowd in private investment. Such a scenario will also keep interest rates benign and inflationary pressures low. That apart, lower borrowing will help the government reduce its debt-to -GDP ratio which currently hovers at 84.9%. Finally, a lower fiscal deficit sets the stage for a higher pace of economic growth.

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