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Why were tax collections at record highs in FY22 despite weak economic recovery?

The Finance Ministry revealed the tax collection figures for the fiscal year 2021-22 on Thursday. According to official statistics, direct tax revenue increased by 49%, and indirect tax revenue increased by 30% in 2021-22.

The Modi government’s overall tax income in 2021-22 was Rs 27.07 lakh crore, a record rise of 34%. This is nearly Rs 5 lakh crore higher than was projected in the budget. Revenue was anticipated to be Rs 22.17 lakh crore in the budget for 2021-22. In 2020-21, the revenue was Rs 20.27 lakh crore.

According to the report, direct revenue reached Rs 14.10 lakh crore in 2021-22, a rise of 49%. Indirect tax revenue grew by 30% to Rs 12.90 lakh crore. According to Revenue Secretary Tarun Bajaj, the direct tax collection was Rs 3.02 lakh crore more than the budget forecast for the previous fiscal year. Revenue from customs duties has also climbed by 41%.

Centre to miss tax collection targetsWhy did the Tax Revenue of India increase, along with the UK and US?

India’s collection for FY22 was about Rs 2 trillion more than the revised expectations, which were a solid Rs 3 trillion higher than the budgeted forecasts from the previous year. This ultimate tax revenue shortfall isn’t surprising. The collections for FY22 are underestimated, I wrote at the time of the FY23 budget presentation.

I claimed that even with the most cautious assumptions, the Centre’s net tax income in FY22 would be Rs 19.3-20 trillion, rather than the Rs 17.65 trillion shown in the revised forecasts.

Let’s look at why receipts were at an all-time high, although India’s GDP at the end of FY22 was likely just 1.8 percent higher than it was in March 2020–two years earlier. Let us begin by mentioning that this high level of collection is also seen in several other nations.

According to the Reuters article, Japan’s tax revenues for the fiscal year ending March 31 were at a record high, considerably above budget forecasts. And according to the attached UK government Department of Finance report, all tax heads—income, corporate, and VAT—grew between 17 and 30 % above year-ago levels in calendar 2021.

How Do Tax-Free Countries Make Money In 2022? - InventivaResearchers at the IMF and economists at big institutions such as Citi and JPMorgan should look into this. Here are some probable explanations:

  1. For most of the calendar years 2020 and 2021, goods purchases outpaced those of services in all nations. Taxing the complete chain of manufactured items in all countries is more straightforward, while many informal services escape the tax net.
  2. Second, and more critically, inflation has been growing for the last half-year, and inflation always raises nominal parameters. Metal firms and other production companies that could pass on price increases saw above-average earnings as a result of high product prices. In several nations, including India, customs duty revenues increased as the nominal value of imports increased.
  3. Third, massive impulses from several countries, including the United States, the United Kingdom, the European Union, and Japan, increased global commerce in 2021. India, too, posted record exports of $418 billion in FY22 and $610 billion in imports. Both raise the whole industrial ecology, resulting in increased tax revenue.
  4. The epidemic tended to boost the official sector at the cost of the informal sector in most nations. Many countries have seen a K-shaped recovery, aided by ultra-loose monetary policy that rewards borrowers (who are often fewer and wealthier) at the cost of savers (poorer and more numerous).

While the strange situation of record tax revenues amid sluggish economic recovery warrants more investigation into whether tax collections will continue to climb at this rate.

If we look at our best guesses, some of the causes that most likely generated the record tax receipts may be questioned. Growth in services has accelerated, but goods purchases have slowed in mass-market products such as soap and scooters. The Russia-Ukraine conflict and the sanctions imposed on Russia as a consequence may have an impact on global commerce. In addition, global economic activity is expected to decrease as central banks begin to withdraw their extraordinarily accommodative policies. On the other hand, inflation seems to be continuing and has even increased in the energy sector. This, together with the high base of FY22, may ensure that tax receipts remain strong in FY23.

Lead Invoker Machine™ – NSW Solutions – Serving the WorldStates also saw a jump in tax revenue. 

The state governments are likely to have done even better than the Central government, which claimed an extraordinary 34 percent yearly increase in gross tax receipts in FY22. According to statistics from 20 large states, total tax revenues — own income plus divisible-pool payments from the Centre — increased by 39% year on year to Rs 18.8 trillion in April-February FY22 resurgent economy, greater compliance, and more enormous transfers from the Centre. In FY22, the overall tax goal for all states was Rs 22.85 trillion, implying a 26 % annual growth rate.

State governments seem to have scaled up their capital investment in FY22 due to a jump in tax income and a reigning in of welfare expenditures after two years of Covid-related indulgence.

In April-February of FY22, the 20 states examined reported a total CAPEX of Rs 3.44 trillion, up 37 % year on year, compared to a 14% year-on-year reduction in the equivalent period of FY21.

These states may post spectacular CAPEX of Rs 5 trillion in FY22, compared to Rs 3.7 trillion in FY21, based on the normal bunching of spending in March — a third of states’ Capex in FY21 was accounted for in the last month of the year —

Compared to the same time in FY20, the pre-pandemic year, the states analyzed had increased their capital expenditures by 18 % during the two years. However, they may still fall short of the year’s ambitious capital goal of Rs 6.09 trillion.

India Economy: India economy to grow at quickest pace among large nations:  Finmin report - The Economic TimesTo meet their investment objective of Rs 7.23 lakh crore for FY22, the cumulative capital expenditure of all states must increase by 44% year on year. According to current trends, total state spending in FY22 might be approximately Rs 6 trillion, up to Rs 1 trillion from FY21.

Uttar Pradesh, Maharashtra, Madhya Pradesh, Tamil Nadu, Karnataka, Rajasthan, Andhra Pradesh, Gujarat, Telangana, Odisha, Kerala, Bihar, West Bengal, Haryana, Chattisgarh, Jharkhand, Punjab, Uttarakhand, Himachal Pradesh, and Tripura are among the 20 states that have been examined.

Uttar Pradesh had the highest CAPEX among these states, at Rs 51,255 crore in April-February FY22, up 59 % yearly. Capex in Madhya Pradesh was Rs 33,929 crore (up 51%), Karnataka’s was Rs 29,598 crore (4%), and Tamil Nadu’s was Rs 28,034 crore (18% ).

With 88 percent of tax income collected in April-February, the total tax revenues of these 20 states may have exceeded the applicable aggregate objective in FY22.

Edited by Prakriti Arora

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