As the tax base hasn’t grown over the year, Should the Government look to other sources of income? | MBA in Bangalore

Posted by Dr. Samiya Mubeen On 20/06/2022 11:45:32

 

Tax systems are primarily aimed at financing public expenditures. Tax systems are also used to promote other objectives, such as equity, and to address social and economic concerns. They need to be set up to minimize taxpayers? compliance costs and government?s administrative costs, while also discouraging tax avoidance and evasion. But taxes also affect the decisions of households to save, supply labor, and invest in human capital, the decisions of firms to produce, create jobs, invest and innovate, as well as the choice of savings channels and assets by investors. What matters for these decisions is not only the level of taxes but also the way in which different tax instruments are designed and combined to generate revenues (what this paper will henceforth refer to as tax structures). The effects of tax levels and tax structures on agents? economic behavior are likely to be reflected in overall living standards. Recognizing this, over the past decades many OECD countries have undertaken structural reforms in their tax systems. Most of the personal income tax reforms have tried to create a fiscal environment that encourages saving, investment, entrepreneurship, and provides increased work incentives. Likewise, most corporate tax reforms have been driven by the desire to promote competition and avoid tax-induced distortions. Almost all of these tax reforms can be characterized as involving rate cuts and base broadening in order to improve efficiency, while at the same time maintaining tax revenues. MBA in Bangalore

 

 

The estimates of FY22 tax revenue versus actual collections until last week show the government's poor fiscal marksmanship, or the accuracy of budget forecasting, to some extent. The revised budget estimates pegged gross tax revenue growth at 24.1% for FY22. But the first three quarters (April-December 2021) had already clocked in a 44.2% increase, which means, the revised estimates imply that gross tax revenue will decline by 14.8% in Q4, as per an RBI article titled Union Budget 2022-23: Some pleasant fiscal arithmetic, released last week. 

This, despite the historical norm of receiving a significant proportion of tax revenue (33.2% on average with a y-o-y growth of 12%) in the last quarter of any given fiscal year.

Based on actual tax collections data for April-January FY22, revised estimates suggest an implicit decline of 18.4% in gross tax revenue during the months of February and March 2022, while the implicit decline in corporation tax, income tax, GST, customs duty, and excise duty works out to 29.2%, 26.5%, 2.3%, and 20.7%, respectively, the article noted. MBA College in Bangalore with Business Analytics 

In reality, tax collections, barring disinvestment proceeds, are going gangbusters. Gross direct tax revenue as of March 16 saw a stupendous 38% increase over the previous fiscal, indicating that even revised estimates will be over-achieved.

What's unclear though is the reason behind the government's overcautiousness in revenue projections for Q4 - a period when tax buoyancy or the responsiveness of tax revenue to growth in nominal GDP is typically higher during recovery years.

In contrast, the revised estimates for FY22 pegged gross tax revenue buoyancy at 0.9, as against the average of 1.4 registered in the past years of economic recovery.

Likewise, direct and indirect tax buoyancy has been budgeted at 1.2 and 0.5 in FY22, as against the average of 1.7 and 1.3, respectively in recovery years.

Moreover, buoyancy in FY23 is based on a nominal GDP growth assumption of 11.1%, which will most likely be exceeded. If fiscal forecasts are way off the mark, it undermines the credibility of annual budgets.

While the Covid-19 pandemic-related economic uncertainty is one possible factor for such conservativism, it's also likely that we still haven't adjusted to the advanced budget-making process.

The modest projection of FY23 nominal GDP at 11.1% also bears testimony to this fact. 

Unlike in the past when the first advance estimates of GDP were released at the end of January after taking into account the economic activity of the first three-quarters of the fiscal, to facilitate budget making, they are now being released in the first week of January, but this takes into account data of the first two-quarters of the fiscal alone, leaving enough room for forecasting bias.  

 

It was only a few years ago that the government seemed to have cracked economic forecasting with accuracy.

Besides their effects on private agents, tax changes also affect the economy through changes in federal finances. If the change is revenue-neutral, there is no issue with f financing effects, since the reformed system would raise the same amount of revenue as the existing system. However, any tax cut must be financed by some combination of future spending cuts or future tax increases—with borrowing to bridge the timing of spending and receipts. The associated, necessary policy changes may not be specified in the original tax cut legislation, but they have to be present in some form in order to meet the government’s budget constraint. Because fiscally unsustainable policies cannot be maintained forever, the financing of a tax cut must be incorporated into analyses of the effect of the tax cut itself.

 

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