Tax revenue in India is a significant component of the central government’s revenue receipts, broadly categorized into direct and indirect taxes. These tax systems have their own unique 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 directly comes under the taxpayer’s duty, 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. The composition of tax revenue receipts in India from 1970-71 to 2023-24 reveals a fascinating evolution of the country’s fiscal landscape, reflecting its economic growth, policy shifts, and changing tax structures. Over the last 53 years, India has experienced a remarkable increase in direct and indirect tax collections, indicative of its expanding economy and improving tax administration.
In the early 1970s, India’s tax receipts were relatively modest, as the direct taxes and indirect taxes were only ₹511 crores and ₹1,940 crores, respectively, in FY 1970-71. This period was characterized by a significantly higher proportion of indirect taxes, which were nearly four times the direct tax collections. This disparity suggests a tax system that relied heavily on consumption-based taxes rather than income-based taxes, potentially reflecting lower per capita incomes and a smaller formal sector. As India progressed through the 1980s and 1990s, there was a steady increase in both tax categories, but indirect taxes continued to dominate. The 1991 economic liberalization marked a turning point when the growth in tax collections accelerated rapidly. In 2000-01, the direct taxes grew to ₹49,651 crores, while indirect taxes reached ₹87,007 crores, which shows that although the share of indirect tax remained higher than direct tax, the direct tax increased rapidly.
The first decade of the 21st century witnessed a significant shift in the tax composition. During this period, direct tax collections grew faster, reflecting the formal economy’s expansion, rising incomes, and improved tax compliance. In 2010-11, direct taxes (₹3,13,501 crores) surpassed indirect taxes (₹2,56,367 crores) for the first time in India’s history, signalling a maturing tax system and a growing middle class. The trend of direct taxes outpacing indirect taxes continued until 2019-20, with direct taxes reaching ₹6,38,365 crores compared to indirect taxes at ₹7,18,537 crores. However, the COVID-19 pandemic in 2020 caused significant disruption, leading to a sharp decline in direct tax collections (₹5,83,210 crores) while indirect taxes continued to grow (₹8,43,077 crores). This shift likely reflects the pandemic’s impact on incomes and corporate profits, while consumption-based taxes remained more resilient.
Post-pandemic recovery has been robust, with both tax categories showing strong growth. In 2023-24, direct taxes reached an unprecedented ₹11,78,268 crores, slightly higher than indirect taxes at ₹11,52,363 crores. In recent years, this near parity between direct and indirect taxes suggests a more balanced tax structure, potentially indicating improved income levels, better tax compliance, and a more formalized economy. The compound annual growth rate (CAGR) for direct taxes from 1970-71 to 2023-24 is approximately 14.7%, while for indirect taxes it’s about 13.3%. This higher growth rate for direct taxes over the long term underscores the structural shifts in India’s economy towards greater formalization and improved tax administration.
In conclusion, the evolution of India’s tax receipts over the past five decades shows us a story of economic transformation, policy reforms, and administrative improvements. The shift from a predominantly indirect tax-based system to a more balanced structure with a significant contribution from direct taxes reflects India’s journey from a developing economy to an emerging global power. However, the recent pandemic-induced fluctuations also highlight the sensitivity of tax collections to economic shocks and the need for a resilient and adaptive fiscal policy.
References
- India, 1961. (n.d.). CHAPTER 6 DIRECT AND INDIRECT TAXES. In Income Tax Act. https://www.mospi.gov.in/sites/default/files/Statistical_year_book_india_chapters/DIRECT-INDIRECT%20TAX-WRITEUP.pdf
- Indirect Tax | DOR. (n.d.). https://dor.gov.in/indirect-tax
- Department of Revenue (DoR) of Ministry of Finance (MoF). (n.d.). Report No. 5 of 2022 (Indirect Taxes – Goods and services tax). https://cag.gov.in/uploads/download_audit_report/2022/3-%20Chapter-1-062f0e3be7c82f0.00161787.pdf
About Author
Pankaj Chowdhury is a former Research Assistant at the International Economic Association. He holds a Master’s degree in Demography & Biostatistics from the International Institute for Population Sciences and a Bachelor’s degree in Statistics from Visva-Bharati University. His primary research interests focus on exploring new dimensions of in computational social science and digital demography.
Akash Dey is a former Sales Executive at Alpine Health. He holds a Bachelor of Business Administration (BBA) from B.P. Poddar Institute of Management and Technology. His key areas of expertise include Decision-Making, Communication, Market Research, Product Marketing, Business Development, and Marketing Strategy.
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of 360 Analytika.
Acknowledgement: The author extends his gratitude to the Reserve Bank of India for providing data support.
This article is posted by Sahil Shekh, Editor-in-Chief at 360 Analytika.
