Buoyancy in Direct Tax Collection

Last Updated : 21 Sep, 2022

A government needs a decent revenue for proper economic growth of a nation and the majority of the government’s revenue is generated by direct tax collection. Now there’s been always a debate on whether to increase the tax rates or not to earn more revenue. However many economists suggest that as far as there is a good buoyancy in the direct tax collection, there is no need to increase the tax rates to produce higher revenue. Good tax buoyancy is quite essential for a positive and consistent economic growth of a nation.

Buoyancy in Direct Tax Collection

What is Tax Buoyancy?

In simple terms tax buoyancy can be understood as a relation between the government’s revenue earned and the % of the increase in the GDP. A tax can be said buoyant if, the revenue generated by the tax collection increases without increasing tax rates. There are many factors that can directly or indirectly affect the tax buoyancy in India working of tax collection authorities, tax base, transparency in taxation, and tax rates. Good tax buoyancy is quite important for the economic growth of the nation, as the economy grows when the government has enough revenue to spend on development projects. And the direct collection is the primary source of revenue for the government.

How is Tax Buoyancy determined in India?

In India, there are many factors that need to be taken into account while determining tax buoyancy, for example, tax base, and simplicity of tax rates. etc. However, apart from these factors, there are many other factors that have an impact on long-term results. For example, if an initiative or a scheme is launched aiming for long-term benefits, may show negative results in its initial period but turn beneficial in the long term. In India, tax buoyancy can be simply calculated by taking a proportion of nominal GDP growth to the tax revenue collection of the same year. If the tax collection increases along with nominal GDP growth then it can be said that the taxation system is buoyant. For example, if the revenue collection from taxes increases by 1% with an increase of 1% in GDP, then tax is considered to be buoyant.

Tax Buoyancy in the Direct Tax collection in India?

The buoyancy in the Indian taxation system has gone through many ups and downs. At present, in the financial year 2022-2023, the tax buoyancy of India is pretty decent but it was not the same, as two decades ago. From 1999-2000, India observed a very weak tax buoyancy, but soon after the economic reforms, the tax buoyancy of India almost doubled during 2003-2004. It was the first time when the government’s revenue collection growth was twice the nominal GDP growth of that time. After that, the tax buoyancy of India increased at a rapid pace and reached 1.7 by the year 2008-2009. But then observed a huge drop in tax buoyancy due to the global financial crisis. It then took around 5-6 years to set the Indian tax buoyancy back on track. From 2014-2019, the tax buoyancy didn’t vary much but by the end of 2019-2020, the tax buoyancy was 1.5%. In the financial year 2022-2023, India is doing pretty good in tax buoyancy and has already collected around 4.8 lac crores by the end of the second quarter.

How can Tax Buoyancy be improved?

In India, tax buoyancy is already performing pretty well, but it can even get better if the below measures are adopted.

Making strong rules and regulations to restrict tax evasion and other discrepancies.
Increasing the tax base by subjecting more people and enterprises to taxes can also increase the revenue collection via taxes.
Channelizing tax rates according to the industry and individual would also in increasing the tax base.
Investing the amount earned via tax collection in the right development projects is also quite important, as it will control the GDP growth.