Gross Central Government Tax Revenues to GDP Ratio has increased to 11.3% of GDP in fiscal 2016-17 from around 10% levels over the last three years. The government has budgeted for a tax to GDP ratio of 11.3% for fiscal 2017-18 in its Union Budget 2017-18 that was presented to Parliament on the 1st of February 2017. Tax to GDP ratio is expected to rise to 11.6% and 11.9% over the next two years.
Demonetization has helped tax to GDP ratio rise in fiscal 2016-17 as also the Income Declaration Schemes. The government through its Benami Transaction Act is looking to crack down on illegal deposits post demonetisation. Focus towards digitizing payments, curbing cash transactions to a maximum of Rs 300,000 and data mining of depositors is expected to increase the number of individuals filing tax returns.
Introduction of GST too will see rise in indirect tax collections over the next few years.
Government has budgeted for a 12% increase in total taxes with corporation tax rising by 15.7% and personal income tax rising by 8.8%. Tax rates for companies with turnover of Rs 500 million has been cut to 25% from 30% while individuals in the tax slab of Rs 250,000 to Rs 500,000 will pay lower tax of 5% from 10%. With exemptions and tax benefits, individuals earning Rs 500,000 and less would not have to pay tax at all. Government is expecting that economic growth would lead to businesses and households earning more and pay more taxes.
On the indirect tax front, government has not budgeted for GST implementation this year. Excise duty has been the saviour for the government with growth of 53% and 36% over the last two years and is budgeted to grow at 5% this year as duty has not been hiked for fuel and other goods this year, unlike the last couple of years. Service tax is budgeted to grow at 11% against 18% growth last year, again due to hike in tax last year and no hike this year. Customs duty grew by just 3.6% last year and with trade reviving, is expected to grow at 12.9% this year.
GST implementation would bring Excise Duty and Service Tax under its fold.
On the Non Tax Revenue front, dividends from RBI and PSU’s grew by 29.6% largely on the back of the government forcing PSU’s to declare one time dividend from their cash surplus. Income under this category is budgeted to grow at negative 7% in fiscal 2017-18. Spectrum auctions and license fees revenues were below budget estimates for last fiscal year but were higher by 40% while for this fiscal year, revenues are expected to fall 44% as no large spectrum auctions are slated to be held.
Disinvestment targets for last fiscal were not achieved but with listing of Railway arms, IRCTC, IRFC, IRCON and focus on more CPSE ETF sales, revenues from this category is budgeted to grow 59% this fiscal.
On the direct tax front, corporate taxes form 58% of total direct tax collections while income tax forms 42% of total direct tax collections. Wealth tax was abolished in fiscal 2015-16. Corporate profitability drives corporate tax collections and if profits do not grow fast in a slowing economy, corporate tax collection growth will be hit. Corporate tax growth has been sluggish in the April-December 2016 period at 10.7%.
Income tax growth largely depends on increasing the base of individuals paying tax. Income tax includes securities transaction tax but that accounts for just 2% of total income tax collection. The more jobs created in the economy the better the income tax collections. Income tax collections have risen 21.2% in the April-December 2016 period largely on the back of Income Declaration Schemes.
Indirect taxes include customs duties, excise duties and service tax. Service tax accounts for 31% of total indirect tax collections and is the focus area of the government. Customs and excise duties form 35% and 34% respectively of total indirect tax revenues. The GST (Goods and Sales Tax) that is expected to be introduced in July 2017would reform the indirect tax structure in India by replacing excise duties and service tax and also would show higher indirect tax collections in the fiscal year 2017-18.
Excise duty collections have risen by 43% in the first nine months of fiscal 2016-17, largely due to higher excise duties imposed on fuel. Customs duties and service tax collections have risen by 4% and 24% respectively and total indirect tax collections have risen by 21.2%.
