Buoyancy in Direct Tax Collections


    In News

    • Recently, according to the data from Central Board of Direct Taxes (CBDT), the Centre’s direct tax collection stood at Rs 4.8 trillion which is 33 per cent more than the Rs 3.6 trillion collected in the same period last year.
      • If the trend continued, direct tax collection for FY23 could exceed the Budget target of Rs 14.20 trillion.

    What is tax buoyancy? 


    • Tax buoyancy explains this relationship between the changes in government’s tax revenue growth and the changes in GDP
    • It refers to the responsiveness of tax revenue growth to changes in GDP
    • When a tax is buoyant, its revenue increases without increasing the tax rate.
    • There is a strong connection between the government’s tax revenue earnings and economic growth. 
      • The simple fact is that as the economy achieves faster growth, the tax revenue of the government also goes up.

    What is tax elasticity?

    • A similar looking concept is tax elasticity. It refers to changes in tax revenue in response to changes in tax rate. 
    • For example, how tax revenue changes if the government reduces corporate income tax from 30 per cent to 25 per cent indicate tax elasticity. 

    Factors responsible in rise in tax collection 

    • GST collection increased 28 per cent year-on-year to Rs 1.43 trillion on better compliance, revival in consumption, and elevated inflation.
      • The level of economic recovery can also be seen from the value of e-way bills generated which has improved from 16.9 lakh crore in 2021 to 25.7 lakh crore in 2022.
    • Corporate tax as of now is growing about 25-26 per cent.
    • The IT department has successfully used technology to reach out to assesses in non-intrusive ways; for instance, sending email reminding them to file return if not already. 
    • Intensive and extensive use of data analytics and artificial intelligence has prompted assessments to report people’s income accurately. 

    Benefits of Tax Buoyancy

    • Government being the beneficiary: The government can feel relieved and happy if the economy achieves higher growth. The biggest beneficiary of a higher GDP growth rate is the government itself.
    • No need to borrow: The government may not borrow highly to finance the budget
    • Welfare measures: New schemes and programmes can be lavished because of high revenue growth.
    • GDP growth: If the GDP growth rate registers high, direct income tax collection will accelerate. Generally, direct taxes are more sensitive to GDP growth rate.

    Way Forward

    • It reflects the healthier balance sheets and growing profitability as it recovered from the pandemic-induced slowdown.
    • The Centre is counting primarily on healthy direct and indirect tax collection this year to maintain its FY23 fiscal deficit target of 6.4 per cent of GDP at a time when its subsidy and welfare spending commitments have increased due to inflationary pressures and supply-chain disruptions caused by the war in Europe.  

    Central Board of Direct Taxes

    • Functions and Organization
      • The Central Board of Direct Taxes is a statutory authority functioning under the Central Board of Revenue Act, 1963. 
      • The officials of the Board in their ex-officio capacity also function as a Division of the Ministry dealing with matters relating to levy and collection of direct taxes.
    • Composition and Functions of CBDT
      • The Central Board of Direct Taxes consists of a Chairman and following six Members
        • Chairman
        • Member (Income Tax & Revenue)
        • Member (Legislation)
        • Member (Administration)
        • Member (investigation)
        • Member (TPS & system)
        • Member (Audit & Judicial) 

    Source: IE