Tax buoyancy

Tax buoyancy is a parameter used to assess the effectiveness and responsiveness of revenue mobilisation in response to GDP or national income growth.

Tax Buoyancy = Proportionate change in the tax revenue/ Proportionate change in GDP

A tax is considered to be buoyant if tax collections increase more than proportionally to an increase in national income or output.

High tax buoyancy indicates that the tax system is sensitive to changes in economic conditions, whereas low buoyancy indicates that the tax system is inefficient or has structural flaws.

Tax Buoyancy: Trends

• A four-year era of tax buoyancy between 2009-10 and 2011-12 was exceedingly irregular.
• From 2014 to 2019, tax buoyancy stayed steady.
• As per PIB, Direct Tax to GDP ratio has increased from 5.62% in F.Y. 2013-14 to 5.97% in F.Y. 2021-22.
• Direct tax buoyancy reached a 19-year high of 2.5 per cent in 2021-22 before falling to 1.1 per cent the following year.
• According to the first advanced projections of GDP for 2022-23 and the Gross Tax Revenue (GTR) in the Revised Estimate (RE) for 2022-23, the implied tax buoyancy for 2022-23 is 0.8. This suggests that taxes have increased at a slower rate than GDP.
• Higher tax collections budgeted by the government, as well as double-digit growth in various tax revenues such as corporation tax, income tax, and GST, among others, can be ascribed to improved tax buoyancy.

Tax Buoyancy: Significance

• Tax System Efficiency:
  • Tax buoyancy is one of the most important indications of a government’s tax system’s efficiency. It assesses how responsive taxation is to economic growth.
  • Tax buoyancy is mostly determined by the size of the tax base, the friendliness of tax administration, and the fairness and simplicity of tax rates.
• Revenue Forecasting:
  • Tax buoyancy aids in more accurate forecasting of tax collections.
  • Policymakers can estimate the impact of economic expansion or contraction on tax revenues by analysing previous buoyancy ratios.
  • This contributes to the development of realistic revenue targets and fiscal policies.
• Economic Stability:
  • A high tax buoyancy suggests that tax income is expanding faster than the economy, which contributes to economic stability.
  • It indicates that the tax system successfully captures the advantages of economic growth and generates enough income to finance government spending, infrastructure development, and social welfare programmes.
• Fiscal planning:
  • Tax buoyancy is an important component in fiscal planning and budgetary management.
  • It assists in analysing the income potential of various tax sources and evaluating their contribution to overall revenue generation.
  • This data assists the government in developing suitable tax policies and making educated resource allocation decisions.
• Tax Policy Evaluation:
  • Tax buoyancy is an excellent metric for assessing the efficacy of tax policies and revisions.
  • It elucidates how tax revenues react to changes in economic conditions and tax rates.
  • Policymakers can examine the impact of tax policy changes and identify areas where tax systems need to be improved by analysing buoyancy ratios.

Tax Buoyancy: Steps taken

• Reform of the Goods and Services Tax (GST):
  • The introduction of GST in July 2017 sought to simplify India’s indirect tax structure and increase tax buoyancy.
  • GST replaced several indirect taxes at the federal and state levels with a unified tax structure, which reduced tax cascading and improved compliance.
  • Increased tax revenues and broader tax coverage have resulted from the GST regime.
• Demonetization:
  • To combat black money, create a digital economy, and increase tax compliance, the Indian government demonetized high-value currency notes in 2016.
  • The goal of this project was to bring previously unaccounted-for money into the tax net, improving tax buoyancy.
• Tax Procedures Simplified:
  • The government has made attempts to streamline tax procedures and reduce compliance burdens.
  • Initiatives like e-filing of tax returns, online tax payment systems, and digitization of tax processes (Faceless Assessment Scheme(FAS) have made it easier for taxpayers to comply and increased tax buoyancy.
• Direct Tax Reforms:
  • The government has implemented several reforms to improve direct tax administration and revenue collection efficiency.
  • These measures include the Direct Tax Vivad se Vishwas, which aims to resolve tax issues and reduce litigation.
  • The administration has also prioritised broadening the revenue base, improving tax enforcement, and encouraging tax compliance.
• Tax Information Exchange and Data Analytics:
  • The government has increased its efforts to improve tax administration by leveraging technology and data analytics.
  • Initiatives like the Income Tax Business Application (ITBA), the Centralised Processing Centre (CPC), and the use of data mining and artificial intelligence aid in the detection of tax evasion, the improvement of compliance, and the increase of tax buoyancy.
• Sector-Specific Reforms:
  • The government has implemented sector-specific reforms to address the inverted duty structure in certain industries.
  • For example, in the textile industry, the government has decreased GST rates on certain inputs while increasing rates on finished goods to minimise the inverted duty structure.
  • Similar policies have been implemented in industries such as chemicals, electronics, and renewable energy.
• International Tax Cooperation:
  • India has taken an active role in international efforts to prevent tax evasion and increase tax transparency.
  • The government has entered into tax information exchange agreements with several nations and has implemented worldwide efforts such as the Common Reporting Standard (CRS) for the automatic transmission of financial account information.
• Anti-Black Money Measures:
  • The government has put in place several measures to combat black money and undeclared income.
  • These include the Benami Transactions (Prohibition) Act, harsher tax evasion laws, and the introduction of the Black Money (Undisclosed Foreign Income and Assets) and Tax Imposition Act.