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Why were tax collections at record highs from US to UK to India despite weak economic recovery

Inflation looks set to continue and has even accelerated in the energy complex. This, and the high base of FY22, may keep tax collections robust in FY23, too

April 17, 2022 / 01:22 PM IST
Representative Image

Representative Image

India’s tax collection for FY22 has indeed turned out to be about Rs 2 trillion more than the revised estimates, which in turn were a good Rs 3 trillion more than the budgeted estimates of last year. This final tax revenue beat doesn’t come as a surprise. I had written at the time of the presentation of the FY23 budget that tax revenues for FY22 are being underestimated.

In fact I had argued that even by very conservative estimates the net tax revenue to the Centre in FY22 would be 19.3-20 trillion versus 17.65 trillion indicated in the revised estimates.

Now let’s try to analyse why tax collections were at a record, when India’s GDP as of FY22-end is likely to have been only 1.8% more than the output in March 2020, i.e. two years ago. Let us start by noting that this high tax collection is the experience in quite a few other countries as well.

In this attached piece, Justin Theal and Alexandra Fall of the Pew Charitable Trusts point out that tax collections in more than half the states of the US in the latest year surpassed the collections they would have made if they had grown at the pre-pandemic pace.

The enclosed Reuters report similarly claims that Japan’s tax collections  for the year ended March 31 were at a record high, far surpassing the budget estimates. And more recently, the attached UK government’s Department of Finance report points out that for calendar 2021 all tax heads- income tax, corporation tax and VAT- grew between 17-30% over year ago levels.

So what explains the record tax collections from US to UK to India to Japan, in a year which saw good recovery from a weak base, but economic growth in most countries didn’t cross the level they would have attained if they had grown at the pre pandemic pace.

This should be the subject of enquiry by researchers in the IMF and economists in global banks like Citi and JP Morgan. Here are a few possible reasons:

  1. Firstly, in all countries goods purchases outstripped that of services for most of calendar 2020 and 2021. In all countries it is easier to tax the entire chain of manufactured goods, while many services that are informal escape the tax net.

  2. secondly and more importantly, the past half year has seen rising inflation and inflation always elevates the nominal parameters. High product prices led to super normal profits for metal companies, as also for other product companies that could pass on price hikes. Also, customs duty collections in many countries, including India, rose as the nominal value of the imports rose.

  3. Thirdly, huge stimuli from many governments like US, UK, EU and Japan led to a pick up in global trade in 2021. India, too, reported record exports of $418 billion in FY22, as also record imports of $610billion. Both push up the entire ecosystem  of manufacturing to result in higher tax collection.

  4. In most countries, the pandemic tended to strengthen the formal sector at the expense of the informal sector. A K-shaped recovery has been the upshot in many economies, with an ultra loose monetary policy abetting the process, by 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 in a context of sub-par economic recovery needs to be analysed thoroughly, the moot point is whether tax collections will continue to grow at this rapid clip.

If we look at our guess of reasons, there  may be a question mark over some of the factors that probably caused the record tax collections. Services growth has picked up and goods purchases have struggled at least in mass consumption items from soaps to scooters. Global trade may suffer due to the Russia-Ukraine war and the resultant sanctions on Russia. Also, global economic activity is likely to slowdown as central banks have begun rolling back the extraordinary accommodation. However, inflation looks set to continue and has even accelerated in the energy complex. This, and the high base of FY22, may keep tax collections robust in FY23, too.

Latha Venkatesh is Executive Editor of CNBC-TV18
first published: Apr 17, 2022 12:52 pm