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Composition of Tax Revenue Receipts in India from 1970 to 2024, by Direct Tax & Indirect Tax

UID: EC-20240830-IN-04

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Source

Reserve Bank of India

Last Updated

September 1, 2024

Time Range

FY 1970-71 – FY 2023-24

Periodicity

Annual

Overview

Tax revenue in India is a significant component of the central government’s revenue receipts, and it is broadly categorized into direct taxes and indirect taxes. Each type of tax has its own structure, impact on the economy, and application in fiscal policy. Direct taxes are those that are directly levied on the income or wealth of individuals and corporations. The responsibility of paying the tax falls directly on the taxpayer, and the burden cannot be shifted to another party. Indirect taxes are those that are not directly levied on income but on goods and services. These taxes are collected by intermediaries (like retailers) from the consumers who bear the ultimate economic burden.

Trends & Insights

In 1970-71, India’s total tax revenue was modest 2,451 crore rupees, with indirect taxes (1,940 crore) significantly outweighing direct taxes (511 crore). This composition, where indirect taxes formed about 79% of the total tax revenue, was characteristic of developing economies, often relying heavily on consumption-based taxes due to a narrow direct tax base. A significant change occurred in 2023–2024 when total tax revenue reached an astounding 23,30,631 crore rupees, and direct taxes (11,78,268 crore) marginally outpaced indirect taxes (11,52,363 crore). The growth trajectory of these tax streams reflects India’s economic evolution and policy shifts. The 1970s and early 1980s saw steady but slow growth in both categories, with indirect taxes maintaining their dominance. The 1980s witnessed an acceleration, particularly in indirect taxes, possibly reflecting increased economic activity and consumption. However, the 1990s marked a significant turning point, coinciding with India’s economic liberalization policies. In the post-liberalization era, From 1991-92 to 2000-01, direct tax collections grew by nearly 390%, compared to about 118% growth in indirect taxes. This shift likely reflects the expansion of the organized sector, rising incomes, and improved tax compliance following economic reforms. The growing share of direct taxes signalled a maturing economy with a broadening tax base.  The 2000s and early 2010s were characterized by robust growth in both tax categories, with direct taxes often outpacing indirect taxes. This period saw several years where direct tax collections surpassed indirect taxes, a significant departure from the historical pattern. The global financial crisis of 2008 appears to have had a limited impact on tax collections, with both categories showing resilience and continued growth through this period. The most recent decade, from 2014-15 to 2023-24, presents an intriguing picture of convergence and fluctuation between direct and indirect taxes. While direct taxes generally maintained a lead for much of this period, recent years have seen a resurgence in indirect tax collections. This shift can be attributed to major policy changes such as the implementation of the Goods and Services Tax (GST) in 2017, which aimed to streamline and boost indirect tax collections. The COVID-19 pandemic had a notable but differential impact on tax collections. In 2020-21, direct tax collections saw a significant dip, likely reflecting the economic slowdown and its impact on corporate profits and personal incomes. Interestingly, indirect tax collections showed more resilience, possibly due to the essential nature of many consumer goods and the quick recovery in consumption post-lockdowns. The near parity between direct and indirect taxes in recent years represents a significant evolution from the heavily indirect tax-dependent structure of the 1970s. This balance suggests a more diversified and mature tax system capable of tapping into both income and consumption as sources of revenue. It reflects not just economic growth but also the formalization of the economy, improvements in tax administration, and policy shifts aimed at creating a more efficient and equitable tax system. Looking forward, the trends in direct and indirect taxes offer valuable insights into India’s economic structure and policy priorities. The strong growth in direct taxes over the decades reflects the expansion of the formal economy, rising incomes, and improved tax compliance. The recent resurgence in indirect taxes, bringing them almost at par with direct taxes, may indicate the success of recent policy measures like GST in broadening the indirect tax base and improving compliance. In conclusion, the five-decade trajectory of India’s tax receipts tells a story of remarkable economic transformation. From a predominantly indirect tax-based system characteristic of a developing economy, India has evolved to a more balanced tax structure typical of maturing economies. As India continues to grow and evolve, the balance and composition of its tax revenues will likely remain a critical area of focus, influencing economic policies, fiscal management, and the country’s overall development trajectory. The future may see further refinements in the tax system to enhance efficiency, equity, and alignment with India’s economic goals in an increasingly globalized and digital world.

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Reserve Bank of India. Composition of tax revenue receipts in India from 1970 to 2024, by direct tax & indirect tax (360 Analytika, Ed.) [Dataset]. 360 Analytika. https://360analytika.com/composition-of-tax-revenue-receipts-in-india-by-direct-tax-indirect-tax/

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