The share of direct taxes in India’s gross domestic product (GDP) reached a 15-year high of 6.11% during the financial year 2022-23 (FY23), according to data released by the Central Board of Direct Taxes (CBDT) on Tuesday. This marks a significant milestone in the country’s fiscal landscape, with the tax-to-GDP ratio hitting its highest level since 2008-09. However, despite this record high, the buoyancy of direct tax collections — which measures the growth in tax revenue relative to economic growth — showed a decline, indicating a complex relationship between economic expansion and tax revenue growth.
A closer look at the direct tax performance
During FY23, India’s nominal GDP grew by 15.11%, while direct tax collections rose by 17.79%. Although this outpaced economic growth, the direct tax buoyancy ratio fell to 1.18 from 2.52 in FY22, highlighting a slower growth in tax collections compared to the previous year. In FY22, direct taxes had grown by 49.12% on the back of a 19.51% increase in nominal GDP, translating into a buoyancy ratio of 2.52.
Despite the drop in buoyancy, the increase in direct tax collections in FY23 was notable. Collections surged by 160.52% to ₹16.64 trillion, up from ₹6.38 trillion in FY14, the final year of the previous government. When compared with gross direct tax collections, the rise was even more significant. Gross collections increased by 173% to ₹19.72 trillion in FY23 from ₹7.22 trillion in FY14.
Contributions to the tax kitty
Direct taxes accounted for 54.62% of the overall tax revenue in FY23, a slight rise from 52.27% in the previous fiscal year. However, this proportion was lower than the 56.32% observed in FY14. The relatively reduced share of direct taxes in the total tax revenue was largely due to the robust performance of the Goods and Services Tax (GST) in FY23. GST collections grew considerably, led by the central GST, which increased by 21.53% to ₹7.18 trillion during FY23. In contrast, the Union government’s excise duty collections saw an 18.37% decline, standing at ₹3.19 trillion for the year.
The steady rise in GST collections reflects the success of the indirect tax system, which has progressively become a cornerstone of India’s tax revenue framework. Nevertheless, direct taxes still form the bulk of the revenue, especially in FY23, where corporate and personal income tax collections saw significant contributions.
Corporation tax vs. personal income tax
The two main components of direct taxes — corporation tax and personal income tax — showed similar levels of contribution in FY23. Corporation tax collections amounted to ₹8.26 trillion, marginally lower than the ₹8.33 trillion collected through personal income tax. This near parity between the two tax types underscores the growing significance of individual taxpayers in the country’s tax system, as more people come under the income tax net.
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Efficiency in tax collection
Another positive takeaway from the FY23 data is the marked improvement in the efficiency of tax collection. The cost of direct tax collection fell to 0.51% of total collections, the lowest since 2000-01. This means that the administrative machinery handling tax collection has become significantly more efficient, translating into more effective use of resources.
The reduction in collection costs points to a stronger institutional framework for tax collection, bolstered by the use of technology, streamlined processes, and improved compliance.
Regional contributions
Maharashtra continued to be the highest contributor to the direct tax kitty, contributing just over ₹6 trillion, which represents 37.4% of the total direct tax receipts from states. If collections from Union Territories are included, Maharashtra’s share stands at 36.4%. This underlines the state’s crucial role in India’s tax system, owing to its strong industrial base and economic activity.
Rising number of tax filers
The number of tax returns filed also saw an uptick during FY23, with 77.8 million returns filed, a 6.5% increase from the previous year’s 73 million returns. This increase indicates a broader tax base and improved compliance, with an additional 6.4 million people filing their tax returns in FY23 compared to FY22. The total number of returns filed reached 74 million during the year, reflecting a steady expansion in the taxpayer base.
Conclusion
The rise in the direct tax-to-GDP ratio to 6.11% during FY23 marks a significant fiscal achievement, indicating that the government’s efforts to widen the tax base and improve compliance are yielding results. While direct tax collections outpaced nominal GDP growth, the lower buoyancy suggests that tax revenue is growing at a slower pace compared to previous years. Nonetheless, the increased efficiency in tax collection and the growing number of tax filers are positive signs of a more robust and mature tax system.
Going forward, maintaining this momentum in tax collections while ensuring a balanced contribution from both direct and indirect taxes will be key to sustaining India’s fiscal health.
