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Economy

Budget 2016: The Shift from Consumption Taxes to Income Tax Since 1970 in Government Revenue

Tax_Receipts_Contribution.jpg

With a couple of days to go for the Union Financial Budget of 2016-17, we take a closer look at the Union Financial Budgets of the previous year to see how the numbers add up.

You can view the previous posts here:

Budget 2016: Securities Transaction Tax Is Only 2% of Personal Tax Collections, But Is Still Unlikely To Be Removed

Budget 2016: Will The Government Tax Long Term Capital Gains from Stock Markets?

As part of this feature, we take a look at Government Revenue – the one decent barometer measuring the government performance or say a report card of how our finance ministers (master of coins as described in The Game of Thrones) both past and present have been performing. Do note: this excludes all politics, mud sheds, gali galocha, hulla bulla. We don’t side with the left or the right, neither do we switch camps like mantri mahodays or go crazy like the guy from Not Times Now. 

For the government, there are multiple sources of revenue. There are 2 types of revenues that the government earns.

  • Tax revenue – the minimum amount that you and me and everyone else cribs and pays every year after applying every trick and loophole. 
  • Non-tax revenue – any revenue earned other than the tax revenue is classified as the non-tax revenue.

Other than these there are Interest Receipts, Capital Receipts and Revenue Receipts. We don’t intend to bore you with the details and would love to completely skip them and talk today only about the Tax and Non-tax revenue.

Revenue Receipts

Revenue receipts refer to those receipts which neither create any liability nor cause any reduction in the assets of the government. Taxes are revenue receipts, and assets sales are capital receipts.

Revenue_Receipts_Graph

The government’s revenue receipts for the year 2015-16 stood at Rs. 11,415.75 billion [Budget Estimate] compared to Rs. 11,262.94 billion [Revised Estimates]. We have down a long road from the Economic Reforms of 1990-91 when the revenue receipts were Rs. 660.3 billion or from the 2001-02 Tech Bubble at Rs. 2,013.06 billion.

Revenue_Receipts

Here are some facts:

  • It took us 8 years (from 1970-71) to move from a double digit revenue to a three digit revenue figure (17 years).
  • It took us only 7 years (1995-96 to 2002-03) to double the revenue receipts from Rs. 1,101 billion to Rs. 2,013.06 billion

Revenue_Receipts_Growth

Tax Revenue

Tax Revenue and Non-tax Revenue which both together make up the revenue receipts. Contribution of the Tax Revenue has always been in the lower 80% while the contribution of Non-tax Revenue has hardly changes since 1970-71. Its avg. contribution has been 24.17% with its highest contribution during the 2001-02 year at 33.67% when Tax Revenue was at its worst at 66.33% since 1970-71.

Revenue_Receipts_Contribution

Tax Revenue is comprised Direct Tax which is further comprised of Personal Income Tax and Corporation Tax and then there is Indirect Tax. 

We let the charts explain:

  • Direct Taxes contributed an avg. of 20.53% of the tax revenue for the period 1970-71 to 1989-90. This is was negative trend where in the contribution fell from the peak of 25.62% in 1976-77 to its lowest ever in the whole period (from 1970-71 to 2015-16) in the year 1989-90 at 15.72%. This was a make or break year for the country during the financial reforms of 1990-91. Since then the contribution of Direct Taxes has only grown positive. Since 1990-91 its avg. contribution has been massive 39.94% (that is almost double than what it was previously) and today Direct Taxes contribute a major share of almost 50% of the Tax Revenues. – notice this in the below chart where the cross over happens between Direct and Indirect Taxes (2009-10).

Tax_ReceiptsTax_Receipts_Contribution

Personal Income Tax and Corporation Tax

Personal Income Tax is the tax paid on the amount a person earns from his salary and Corporate Tax is the same with the difference that this tax is applicable for non-living bodies i.e. Companies.

From Rs. 1.14 billion Personal Income Tax and Rs. 3.71 billion Corporate Tax, we have come to Rs. 1,987.6 billion for Personal Income Tax and Rs. 2,964.31 for Corporate Tax.

Direct_Tax_Receipts

Since 1970-71 to 2015-16 [BE], we have had -10 and +35 years while for Corporate Tax it has been -4 and +41 years in terms of tax revenue. Both Personal Income Tax and Corporate Tax have converged only once i.e. in 2000-01 during the Tech Bubble.

Personal_Corporate_Tax

Summary and Notes

  • India has moved from a largely-indirect-tax structure (which is on consumption) to a more balanced tax structure (more income tax)
  • In the coming year we will see a lot more in terms of indirect taxes due to the increase in excise duty of petrol and diesel, and a lower direct tax because of bad corporate results.
  • Personal taxes have been growing as a percentage of the total tax receipts.
  • Taxes are 80% of all government revenue. The rest comes from dividends and other mechanisms.

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Disclaimer

Nothin
g in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion. 

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