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How growth in indirect taxes outpaced increase in direct taxes

24 January, 2017

Economists say that governments must strive to collect more revenue from direct taxes and comparatively lesser from the regressive indirect taxes if they want to reduce inequality.

But a close look at data since 2009-10 indicates that India has moved in the opposite direction.

For, while collections from direct taxes such as corporate tax and personal income tax have risen in absolute terms, their contribution to India’s total tax revenue has fallen. On the other hand, the share of indirect taxes such as excise duty, customs and service tax has risen.

Direct taxes accounted for a tad above 60% of the total tax collections in 2009-10. In 2016-17, their share is estimated to fall to less than 52% of the budgeted gross tax revenue of Rs 16.3 lakh crore. This is almost entirely because of a drop in the share of corporate taxes from about 39% to roughly 30%.

Also, direct taxes have been growing at a slower pace than indirect taxes. The estimated growth in collections from corporation tax and income tax from 2012-13 to 2016-17 is 52%. This compares with the estimated 64% rise in revenue from excise duty, service tax and customs duty during the period.

Within indirect taxes, excise duty collections surged at the fastest pace—80%. This is partly because the Narendra Modi government has increased excise duty on petrol and diesel multiple times since taking over in May 2014 to shore up revenue at a time when international crude oil prices had been falling. Service tax collections jumped as the government increased the tax rate from 12.36% to 15% in stages.

Will finance minister Arun Jaitley take any measures to change the course? We’ll find out on 1 February when he presents the budget for 2017-18.

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How growth in indirect taxes outpaced increase in direct taxes

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