Not just by spending cuts

The Centre must look at non-tax measures to boost its fiscal performance

- A K BHATTACHARYA

The healthy rise in the Union government's direct tax collections over the last few years has led to celebrations within the finance ministry. This is understandable. According to an analysis by the Central Board of Direct Taxes (CBDT), the share of direct taxes in gross domestic product (GDP) in 2023-24 rose to a 24-year high of 6.64 per cent. In 2000-01, this number was about half, at 3.25 per cent.

An equally important development during this period, not captured by the CBDT analysis for obvious reasons, was the decline in the share of indirect taxes in GDP. From 5.62 per cent of GDP in 2000-01, the share of indirect taxes fell to 5.11 per cent in 2023-24.

The Union government's gross tax collection efforts, therefore, rose from 8.8 per cent of GDP in 2000-01 to 11.7 per cent in 2023-24. Not only did gross tax collections maintain a steady growth rate in this period, but their composition also got better, with direct taxes accounting for 57 per cent of gross collections last year, up from about 36 per cent in 2000-01. This is a healthy sign as the Centre is relying more on direct taxes, which are more equitable, and less on indirect taxes.

Raising the share of direct taxes in the Centre's gross tax collections was a big challenge when economic reforms were launched in 1991. Gross tax collections in 1990-91 were estimated at a shade lower than 10 per cent of GDP, of which direct taxes accounted for only 1.9 per cent and the share of indirect taxes was over 8 per cent. By the end of that decade, overall gross tax collections fell to 8.8 per cent of GDP, but the share of direct taxes rose by over 70 per cent, while that of indirect taxes fell by about 30 per cent. A healthy correction in the mix of direct and indirect taxes had begun taking place in the 1990s, even as the overall tax collection efforts had weakened.