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:
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.