Responsiveness (Buoyancy) of Union Taxes to GDP in India (1990–91 to 2015–16)

Abstract

Changes in tax receipts of government take place with changes in Gross Domestic Product (GDP). Such changes in tax receipts may be the result of two factors: (1) there may be automatic changes in the tax yield when tax parameters are held constant. Such automatic changes are referred to as elasticity or built-in flexibility. (2) Increasing tax receipts may also necessitate imposition of new taxes, changes in rate structure of existing taxes, expansion of tax base, changes in scheme of exemptions, etc., or briefly referred to as discretionary changes. The overall responsiveness of tax revenues to discretionary changes in tax scheme (including automatic responses) is called responsiveness or buoyancy of the tax system and it is measured as the percentage change in tax receipts over percentage change in GDP. The tax structure of the Union Government in India is composed of direct and indirect taxes. In terms of tax receipts, direct taxes are mainly composed of corporation tax and income tax while indirect taxes mainly include customs, excise duties and service tax. An analysis of responsiveness (buoyancy) reveals that the overall buoyancy of union taxes has been 1.04. Direct taxes have had a higher buoyancy coefficient. Within direct taxes, corporation tax has exhibited higher buoyancy as compared to income tax. Buoyancy coefficient of indirect taxes has been less than 1.0 and within indirect taxes, buoyancy of excise duties has been lower than that of customs. Service tax has, however, revealed the highest buoyancy coefficient. Some of the factors responsible for lower buoyancy (responsiveness) of Indian taxes have been relatively slower expansion in base, increase in threshold limits, and large number of exemptions, rebates and deductions under tax laws, reduction in customs and excise duty rates under the impact of New Economic Policy, increasing tax evasion etc. It is high time that tax/GDP ratio in India be considerably raised through improving buoyancy coefficients. This would necessitate considerable expansion in tax base, bringing agricultural incomes under the Central Income tax net, rationalization of tax-preferences/incentives, bringing non-filers in unorganized sectors under the tax net, concentrating on High Net Worth Individuals, checking avoidance and evasion of taxes and improving tax administration. There is also need for introducing ‘accountability’ and switching over to ‘family’ as the unit of assessment.