Widening of tax base, enforcement measures behind high tax buoyancy in H1FY24

financialexpress.com:

Multi-year-high tax buoyancy recorded in the first half of FY24 by the Centre raise questions about how much of the spurt is attributable to higher revenue productivity, and the use of the implicit price deflator.

Statistically, the buoyancy of a tax system gauges the overall responsiveness of tax revenue to variations in the GDP, and deliberate adjustments in tax policies over time. Policymakers have traditionally interpreted it as the percentage variation in revenue linked to a one percent change in GDP growth in nominal terms.

The ratio is significant, as typically if the tax buoyancy is below 1, it denotes the government would resort to raising revenue through other means – either non-tax revenue or market borrowing. Generally, over the longer run, it’s expected that tax buoyancy is equal to one.

“If the tax buoyancy is 1 (that’s if the nominal GDP and tax collections both grow at the same pace), it means that the tax system is efficient as generating revenue in parallel to the growth being generated,” said DK Pant, chief economist, India Ratings and Research.

“But if it grows beyond 1 consistently for two-three years, then it means, those taxpayers who were not a part of the tax net before have been brought in it, and the tax base has widened,” he said.

In H1 FY24, the tax buoyancy was at 1.9 – which is the highest recorded in the past six years, barring FY22 when it was 2.6 due to low base, but this is also partly due to the lower nominal GDP growth, which was depressed on account of negative WPI (wholesale price index) prints in the first half. In H1, gross tax collections, net of refunds, grew 16.3% year-on-year. And GDP, in nominal terms, grew by 8.6%.

However, even if nominal GDP had grown 11% during H1, tax