India heading towards a tax revolution – News9 LIVE

To the surprise of many analysts, there has been a substantial increase in the growth of tax revenues recently. The first surprise came with the Goods and Services Taxes and the second was with the pick-up indirect taxes. Many analysts have been befuddled by the tax buoyancy more so for the personal income direct taxes. So, what explains the recent pick-up in tax revenues?

Tax revenues are always a function of economic growth and improvements in tax compliance. For GST, both are at play as compliance has picked up and so has economic activity. Add to that the price pressures and since the GST is on the value of the product so if the value goes up, so does the taxes.

A combination of these three factors explains the surge in GST revenues. Don't get me wrong, the economy is doing rather well, in fact much better than what was anticipated. But even that does not fully explain the surge in tax revenues.

Many of the benefits of GST in terms of improving compliance seem to be here and perhaps some of it is also because of an effort to improve compliance. Going forward perhaps we need more carrots and fewer sticks to drive further improvements.

But what explains the direct tax collections? Corporate incomes have certainly improved to some extent and that is also reflected in the tax collections. Moreover, the reduction of the corporate tax rate has improved compliance.

The compliance effect of the 2019 corporate tax cut was to be felt in 2021 but unfortunately, because of COVID, that impact got delayed. Now that this effect is visible, we have to concede that tax collections can be improved even by decreasing tax rates. This realisation is important because at some point a reform of the overall direct taxes are due along with the modified direct tax code. And this change should be geared towards driving revenues through improved compliance rather than through higher rates.

Back to the Direct Tax Collections, which are at Rs 13.6 lakh crores as per the CBDT and about 9 per cent higher than the revised estimates of Rs 12.5 lakh crores. That the tax collections have been good is not a surprise largely because the economy has done well and because Government has been extremely conservative with respect to their fiscal calculations.

But it is not a criticism of the government that they were conservative but it is rather something to be admired. More so given that in India fiscal numbers are rarely conservative or even accurate. In such an environment, there has been a genuine attempt by the present Finance Minister to clean up our fiscal books and ensure greater transparency with respect to the numbers. This should also help bond markets be able to better price the bonds and help reduce the cost of borrowings over a period of time.

The immediate implication of the tax buoyancy is that government has room for further reduction in oil excise should it desire in the event of an increase in global oil prices. This can be done without an increase in the fiscal deficit or a reduction in the government's Capex plans and perhaps it may be a wise decision to take over the coming months.

The alternative is to allow for fiscal consolidation to be faster than that stated in the budget. This may not be a bad approach but given that nobody is expecting a faster consolidation and one does not expect any substantial reduction in bond yields that would make this a viable alternative.

Ultimately, the question is on the extent of support to growth. Growth and compliance have picked up which is a positive, but we must continue to support it in the event of a large oil price increase as we witnessed recently when oil prices were expected to touch 130$ per barrel.

The thing about additional tax revenues is that it puts the fiscal in a comfortable situation where there are plenty of options available to policymakers in the event of any external shocks. That freedom is critical to intervene in the form of policy support be it in the form of oil tax cuts or improving capital outlays.

It is this recognition regarding the strength of the Indian economy that explains why despite a US Fed hike, markets and the currency have been broadly stable. This is in contrast with the 2013 episode of the taper tantrum. Of course, this was just a modest rate hike, but it reassures me that a repeat of 2013 is unlikely over the coming months.

There were many who were losing hope in the Indian economy and now we can safely conclude that they were wrong as the Indian economy is on a particularly strong footing and it is expected to only get better going forward.

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India heading towards a tax revolution - News9 LIVE