Context
∙ The net Direct Tax collection is 80.61% of the total Budget Estimates of Direct Taxes for F.Y. 2023-24.
What is Tax?
∙ In order to garner income for the government to finance social projects, tax is collected from individuals and corporations via direct tax and indirect tax.
∙ Direct tax is the tax that is paid directly to the government by the person or company on whom it is levied.
∙ Income tax, wealth tax, corporation tax, and property tax are some examples of direct tax.
∙ Indirect taxes are those that are collected by intermediaries from individuals and corporations who bear the burden of the tax and passed on to the government.
∙ Goods and Services Tax (GST) is an example of indirect tax.
∙ Corporation tax forms a large chunk of the government’s tax revenue.
Taxes as the Source of Income of the Government
∙ Revenue receipts can be of two types — non-tax revenue and tax revenue.
∙ Tax revenue is the income gained by the government through taxation.
∙ Tax revenue forms a part of the Receipt Budget, which in turn is part of the Annual Financial Statement of the Union Budget.
∙ The Union Budget is classified into Revenue Budget and Capital Budget.
∙ Total tax revenue as a percentage of GDP indicates the share of the country’s output collected by the government through taxes.
Overview of Direct Tax Collection in India
∙ Widening the tax base has been one of the key action plan areas for the last several years but achievement has fallen short of targets.
∙ There is a need to enlarge the tax base as well as taxpayer base through both policy as well as enforcement action by bringing into the tax net high net worth assesses and potential tax payers.
∙ The focus has to be on bringing in new taxpayers, rather than putting a heavier burden on payers who are already in the tax net by targeting sectors that are currently untaxed, especially the informal/unorganised sectors.
Significance of Growth in Direct Tax Collection
∙ Fiscal Stability: A growing direct tax collection contributes to fiscal stability by reducing reliance on borrowings and ensuring a sustainable revenue stream. This is crucial for maintaining a balanced budget and avoiding fiscal deficits, which can have adverse effects on the overall economy.
∙ Fund Allocation for Developmental Schemes: The higher-than-expected revenue also means the Centre can direct some proceeds towards developmental schemes without having to worry about breaching the fiscal deficit.
∙ Signal of Economic Growth: Increasing direct tax collection is often associated with economic growth. As individuals and businesses earn higher incomes and profits, direct tax revenues tend to rise.
∙ Creditworthiness: Higher direct tax collections can positively impact a country’s creditworthiness in the international financial markets.
∙ Budgetary Planning: Reliable and growing direct tax revenues provide the government with a more predictable source of income, facilitating better budgetary planning and execution of government programs.
Measures Taken by Government for the Growth of Direct Taxes
∙ Tax Reforms: The government periodically introduces reforms to simplify the tax structure, reduce compliance burdens, and enhance transparency.
∙ Digital Initiatives: Initiatives such as the Goods and Services Tax (GST) and the use of online tax filing systems aim to streamline tax administration, reduce manual errors, and improve overall efficiency.
∙ Taxpayer Education and Awareness: Public awareness campaigns and educational programs have been conducted to inform taxpayers about their rights, obligations, and the benefits of complying with tax regulations.
∙ International Cooperation: India has actively participated in international initiatives for the exchange of tax-related information. Collaboration with other countries helps in tracking and taxing income generated abroad by Indian residents, reducing the scope for tax evasion.
∙ Simplification of Tax Laws: Efforts have been made to simplify and rationalize tax laws to make them more comprehensible for taxpayers.
∙ Clarity in tax laws can contribute to better compliance and reduce disputes between taxpayers and tax authorities.
Way Ahead
∙ Taxes are vital resources whose maximisation and mobilisation is of importance to governments to finance the development needs of the poor and under-privileged sections of society and important sectors of the economy.
∙ This is possible through the expansion of the tax base and taxpayer base.
∙ Tax administration to professionalise the administration and make it taxpayer friendly also needs to be pursued with vigour to improve the administrative efficiency and compliance.
