The Hindu Business Line : Direct taxes’ share of revenue kitty tops 50% for first time

New Delhi, Feb.29 2007-08 would be a landmark fiscal, when, for the first time, direct taxes would contribute more than 50 per cent of the Centre’s revenue kitty. Of the total of Rs 5,85,410 crore to be mobilised from all Central tax sources in the current fiscal (revised estimate), direct taxes — mainly those on personal income and corporate profits — will account for Rs 304,760 crore or 52.06 per cent.

For the coming fiscal, these numbers are budgeted at Rs 6,87,715 crore, Rs 3,65,000 crore and 53.07 per cent, respectively. To grasp the significance of the above, one needs to only go back 15 years or more. In 1990-91, less than a fifth of the Centre’s gross tax revenues came from direct taxes. The major tax source then was excise, followed by Customs. Thus, the Centre mainly taxed production and trade, as opposed to incomes or profits.

This has changed in the post-reforms period, with the share of direct taxes rising steadily and beyond the 50 per cent mark in 2007-08.

The biggest taxation source for the Centre since 2006-07 is corporate profits (Rs 186,125 crore in 2007-08), ahead of excise (Rs 1,27,947 crore), income (Rs 1,18,320 crore) and Customs (Rs 1,00,766 crore).

In the coming fiscal, excise is expected to be dislodged from even its No.2 slot by personal income-tax. The sheer buoyancy in direct taxes can be seen from the fact that total collections in 2007-08 have exceeded the budget estimates by a mind-boggling Rs 37,270 crore, even as excise revenues have fallen short of target by Rs 2,273 crore!

The shift away from indirect to direct taxes all through the post-reforms period is viewed as progressive on two counts. Firstly, by taxing earnings of individuals and corporates rather than production and trade, there is less stifling of economic activity and employment generation. Secondly, whereas taxes on goods are paid by the poor and rich alike, taxes on income and profits have a relatively egalitarian character.

The other important change, which has led to a progressive widening of the tax base, has been service tax. Before 1994-95, the Centre was not realising a single pie by taxing services —a sector that accounts for 55 per cent of the country’s gross domestic product (GDP). In the current fiscal, service tax is slated to yield Rs 50,603 crore, while being budgeted at Rs 64,460 crore for 2008-09.

Thus, within indirect taxes, there is growing reliance on taxing services in addition to only domestically manufactured or imported goods.

Another positive development is the Centre’s overall tax-GDP ratio. Between 1990-91 and 2000-01, this had slumped from 10.11 per cent to 8.97 per cent. But with a revival in the economy, not only has the trend been arrested; in 2005-06 the tax-GDP ratio crossed double digits and is budgeted at nearly 13 per cent for 2008-09.

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