Analysing new revenue information

There is new revenue data available that is revealing in terms of revenue trends and, therefore, worth analysing (Time Series Data 2000-01 to 2017-18, Income Tax Department).To begin, on the statistics itself, the 2017-18 numbers are provisional and estimates for 2016-17 are the first revised estimates with base year 2011-12. From 2014-15, the GDP base year used is 2011-12. The GDP series for 2004-05 to 2013-14 used 2004-05 as base year. These are clubbed together. Though the impact on buoyancy calculations may not be high, consistency is warranted (see my column dated June 5, 2016).

Buoyancy is the percentage response in tax revenue to a 1 per cent increase in GDP. Clearly the 2017-18 data reveals a pretty high buoyancy of 1.8 (see Figure 1), on a steadily increasing path from 2015-16. The earlier period during which such steadily rising buoyancy manifested itself was between 2004-05 and 2006-07, when buoyancy shot up from 1.5 to 2.4. That was a period of exceptional private business sector growth so that its tax revenue contribution was also on a sharply rising trend. 

Statistics of prevailing times do not reveal the same kind of growth in the private business sector which faces challenges in growth in its various subsectors. The question, therefore, arises where from a high tax revenue buoyancy of 1.8 emerges. The answer should ideally reflect an increasing number of income taxpayers, which would be an achievement. It could arise as outcomes of efforts made by the tax administration in bringing tax evaders and fence-sitters into the tax net. On the other hand, additional revenue may be obtained by pursuing a revenue goal. This puts pressure on bad and good taxpayers alike but it could also reflect pressure on officers to collect tax irrespective of the state of the economy. 

The challenge of policymakers is to expand the taxpayer base while eschewing unjustified revenue pressure on taxpayers and on tax officers alike. The revenue goal has been replaced by advanced tax administrations with revenue monitoring systems that are linked to the ongoing business cycle. To bring Indian industry back on track, such an approach is now needed. Between the two — reducing tax rates through more tax incentives for flagging sectors and reducing tax pressure — the latter would be more effective in raising the economy back to its fundamental growth path. Admittedly, this is not easy to achieve but this strategy has had success in economies in which it has been implemented. Policymakers need to look into the mores and practices of tax administration at the field level. If so, buoyancy could rise even beyond 1.8 on a secular basis. Otherwise it will be temporary and reflect the ephemeral impact of tax pressure by the administration.

Figure 2 demonstrates a “double” scissors pattern with direct tax steadily gaining and then overtaking indirect tax in share of total revenue from 2007-08 but, after achieving the highest difference in 2009-10, the gap narrowed until 2015-16. And, in 2016-17, the share of indirect tax once again exceeded that of direct tax, with indirect tax accounting for 50.3 per cent of tax revenue. But in 2017-18, direct tax again overtook indirect tax, representing 52.3 per cent of tax revenue. The interim period of indirect tax being higher than direct tax reflected a return to customs duties and domestic excise. In the prevailing global taxation scenario, where the US is imposing barriers on trading partners that it deems to levy high customs duties, India needs to examine its customs and excise duty regimes. 

A question arises as to why, in 2017-18, direct tax overtook indirect tax in its contribution to overall tax revenue: Is it exclusively expansion in taxpayer base—indeed there has been steady growth in the number of taxpayers — or is it also an increase in tax pressure? Or is it as well a reflection of revenue dampening from GST due to high input tax credit in the economy as a whole, and due to larger refunds in particular in the export sector? In turn, they would cause GST to be unable to yield its expected or projected revenue. 

Is it also due to the many changes in GST rates in the post-introduction period that continues presently? Indeed rate reductions may be needed from a structural perspective in sectors where the rates have caused build-up of excess input tax credit—creditable inputs have higher tax rates than outputs. But a policy challenge remains not to change other rates in cases where build-up of input tax credit is not an issue, rather, rate reductions reflect political expediency in India’s fiscal federal state in which Centre-state give and take may reign supreme.

In any event, after post-tax rate reductions, the burden on suppliers to prove that they have not “unduly enriched” themselves (by not passing on the accompanying benefit to consumers) before refunds are given, has to be minimised. Absence of undue enrichment is difficult to prove, leads to complaints if not litigation, corroding GST’s advantages. Further, if export refunds increase, as long as they are legitimate, they should be granted quickly rather than protecting the need for revenue as a binding constraint. Government’s effective guidance to the field, indicating refunds should be quick as evidenced in the Central Board of Indirect Taxes and Customs Chair’s weekly reports, is reassuring. Field level reform has to be monitored in both direct and indirect taxes, intensifying improvements that are occurring.