In fact, I had argued that even under very conservative estimates, the Centre’s net tax revenue in FY22 would be Rs 19.3-20 trillion compared to Rs 17.65 trillion given in the estimates revised.
Now let’s try to analyze why tax revenue hit an all-time high when India’s GDP at the end of FY22 would likely have been only 1.8% higher than March 2020 output, it two years ago. Let’s start by noting that this high tax collection is also the experience of a number of other countries.
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So what explains the record tax receipts from the US to the UK to India and Japan in a year that has seen a healthy recovery from a base weak, but economic growth in most countries has not crossed the level they would have reached if they had grown at the start of the pandemic.
This should be investigated by researchers from the IMF (International Monetary Fund) and economists from global banks like Citi and JPMorgan. Here are some possible reasons:
1. First, in all countries, purchases of goods exceeded purchases of services for most of calendar years 2020 and 2021. In all countries, it is easier to tax the entire chain of manufactured goods, while to many informal services escape the tax net.
2. Second and more importantly, the last half year has seen inflation rise, and inflation is still pushing up nominal metrics. High product prices led to super normal profits for metal companies, as well as other product companies that could pass on price increases. In addition, customs duty collections in many countries, including India, increased as the nominal value of imports increased.
3. Thirdly, huge stimuli from many governments like US, UK, EU and Japan led to global trade recovery in 2021. India also reported record exports of 418 billion in FY22, as well as record imports of $610 billion. Both push the entire manufacturing ecosystem upwards to drive higher tax collection.
4. In most countries, the pandemic has tended to strengthen the formal sector at the expense of the informal sector. A K-shaped recovery has been the result in many economies, with ultra-loose monetary policy encouraging the process, rewarding borrowers (who are typically fewer and richer) at the expense of savers (who are poorer and more numerous).
While the curious case of record tax collections amid a lackluster economic recovery needs deep analysis, the moot point is whether tax collections will continue to grow at this rapid pace.
If we examine our guess at the reasons, there may be a question mark over some of the factors that likely caused the record tax collections. Growth in services accelerated and purchases of goods struggled, at least in FMCG items, from soaps to scooters. World trade could suffer from the Russian-Ukrainian war and the resulting sanctions against Russia. Additionally, global economic activity is expected to slow as central banks have begun to roll back extraordinary accommodation measures. However, inflation is expected to continue and has even accelerated in the energy complex. This, along with the high FY22 base, can also maintain robust tax recoveries in FY23.