Healthy Tax collection and the challenge of effective utilization
06, Dec 2022
Why in News?
- Notwithstanding the likely slowdown in economic momentum in the second half of the year, the Union government’s tax collections are on track to surpass its budgeted target by a significant amount this year.
The current status Union government’s tax collection:
- Gross tax collections have already touched the target: Data released by the Controller General of Accounts last week shows that gross tax collections have already touched 58 per cent of the full year’s target, growing by 18 per cent in the first seven months (April-October) of the current financial year.
- Healthy growth in corporate tax collection: Under the broad rubric of taxes, direct tax collections have grown by a robust 26 per cent in the first seven months of the financial year, with healthy growth being seen across both corporate and income tax collections.
- Higher than the nominal GDP growth: While the pace of direct collections has eased during July-October when compared to the first quarter, it continues to be higher than nominal GDP growth in the second quarter.
- Healthy indirect tax collection: On the indirect tax side, GST collections continued to witness healthy growth, recording an increase of 11 per cent in November.
Memory shot in short: Types of Direct Taxes:
- Income Tax: Depending on an individual’s age and earnings, income tax must be paid. Various tax slabs are determined by the Government of India which determines the amount of Income Tax that must be paid. The taxpayer must file Income Tax Returns (ITR) on a yearly basis. Individuals may receive a refund or might have to pay a tax depending on their ITR. Penalties are levied in case individuals do not file ITR.
- Wealth Tax: The tax must be paid on a yearly basis and depends on the ownership of properties and the market value of the property.
- Estate Tax: It is also called Inheritance Tax and is paid based on the value of the estate or the money that an individual has left after his/her death.
- Corporate Tax: Domestic companies, apart from shareholders, will have to pay corporate tax.
Foreign corporations who make an income in India will also have to pay corporate tax.
- Capital Gains Tax: It is a form of direct tax that is paid due to the income that is earned from the sale of assets or investments
What the Healthy tax collection imply?
- Higher devolution to states: Higher tax collections at the level of the central government imply that devolution to states will be higher than the budgeted amount of Rs 8.16 lakh crore. The months of August and November have in fact witnessed double instalments as the Centre has stepped up devolution.
- States can increase fiscal expenditure: Along with the interest free loan scheme extended by the Centre, higher devolution implies that states have considerable fiscal room to increase capital expenditure. However, this has not been the case so far. Capex by states has been rather muted.
- Provides comfort to governments fiscal arithmetic: As per recent statements by revenue secretary Tarun Bajaj, the government is now hopeful of exceeding the budgeted target by nearly Rs 4 lakh crore. With its spending also likely to surpass earlier expectations by a considerable margin, higher tax collections will provide some comfort to the government’s fiscal arithmetic.
Challenges on the expenditure side:
- Increased subsidy bills: On the expenditure side, the Union government is facing a massive increase in its subsidy bill.
- Spending is more than actual budget: Actual spending on the food and fertilizer subsidy and also on LPG will be significantly higher than what has been budgeted for. This is likely to make the fiscal situation challenging.
- Effective utilization is necessary: Considering that the central government has maintained the momentum on its capital spending, growing by around 60 per cent in the first seven months of the year, the overall general government fiscal impulse will depend on how effectively states are able to utilise the extra space available to them.
- Calls for increasing spending to support the economy during this uncertain period will only gain traction as the budget approaches. The government must however resist the temptation. It should stick to the glide path of fiscal consolidation.