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.
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 this 53-year period, India has experienced a remarkable increase in both 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, with direct taxes at ₹511 crores and indirect taxes at ₹1,940 crores in 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, accelerating the growth in tax collections. By 2000-01, direct taxes had grown to ₹49,651 crores, while indirect taxes reached ₹87,007 crores, still maintaining a higher share but with direct taxes gaining ground.
The first decade of the 21st century witnessed a significant shift in the tax composition. Direct tax collections grew at a faster pace, reflecting the expansion of the formal economy, rising incomes, and improved tax compliance. By 2010-11, direct taxes (₹3,13,501 crores) surpassed indirect taxes (₹2,56,367 crores) for the first time in the dataset, signaling 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 a 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. By 2023-24, direct taxes reached an unprecedented ₹11,78,268 crores, slightly higher than indirect taxes at ₹11,52,363 crores. This near parity between direct and indirect taxes in recent years 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 tells 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.
