A notable trend visible over the past few years is the prominent role played by personal income tax (PIT) in the total tax collections, helping in buoying India’s tax-GDP ratio. By comparison the corporate income tax (CIT) collections, though increasing, have witnessed a slower momentum.
India’s tax-GDP ratio for FY24 stood at 11.7% for the Centre and nearly 18.5% for centre and states combined. The combined tax-GDP ratio in FY22 was at 17.7%. The improved ratios now compare favourably with the tax-GDP ratios (exclusive of Social Security Contributions) of other Asian economies.
Among many OECD countries, taxes on personal and corporate incomes are the most important revenue source for govts to finance their public spend. In some countries, the share of PIT in total tax collection is considerable. For instance, in 2022, the PIT share in total tax collections (excluding SSC) was as high as 44% in the US and 55.8% in Denmark. In India too, the share of personal tax collections in centre’s gross tax collections has been increasing over the years. For instance, since FY2017-18, the share of PIT in gross tax revenue (GTR) has increased from 21.3% to over 29% in FY24. The latest data available for the current fiscal (April to Nov 2024) indicates the PIT contribution at 31% of the centre’s GTR collections. As against this, the share of CIT in centre’s GTR has shrunk from 29.8% in FY18 to 26.3% in FY24. In the first eight months of the current financial year, the CIT contribution to GTR stood at 22.6%.
Govt data indicates that for FY23, India had 10.4 crore taxpayers, with 10.3 crore non-corporate taxpayers – an increase of 23.3% over FY18 when out of total 8.5 crore taxpayers, 8.4 crore were non-corporate taxpayers. Clearly, the economic growth and resultant rising incomes, combined with govt’s determined focus on widening the tax net and plugging tax leakages through multiple measures have yielded higher PIT collections. Factors such as buoyant capital market yielding higher capital gains tax collections and taxation of dividends in the hands of individuals as against companies earlier, also contributed to taking the PIT collections a notch higher.
Global tax trends indicate that post Covid, from 2023 onwards, govts are moving against corporate tax rate cuts and focusing on base broadening initiatives across most tax types. The average OECD corporate tax rate has remained relatively stable in last five years, with the rate moving from 21.7% in 2019 to 21.1% in 2024. Even the PIT reforms are aimed at generating additional revenues, enhancing equity within the tax system and supporting low and middle-income households. In keeping with this trend, the cornerstones of tax proposals in India’s last few Budgets have been stability in tax rates, simplification in law and smart administration to widen the base.
India’s effective corporate tax rate of 25% (with no incentives) has helped improve its tax competitiveness vis-a-vis other countries. The moderate rates also encourage private investments and job creation.
Govt’s own analysis indicates that in FY22, the total income being taxed under section 115BAA of the Act (22% rate) showed an increase of 29.77% over the income being taxed under the same section in FY21. Also, the total income taxed under section 115BAB of the Act (15% rate) showed an increase of 206.5% over the income being taxed under section 115BAB in FY21, thus bringing out the growing adoption of the new concessional tax regime. While the declining growth in CIT revenues is a concern, govt may consider bringing back the concessional tax regime (15% earlier) for new domestic manufacturing companies keeping in mind the long-term benefits in the evolving geopolitical situation.
On the personal income tax rates front, the peak tax burden with applicable surcharge and cesses is a high of 42.7%. Though it compares favourably with countries like China (45%), Denmark (56%), France (45%), Italy (43%) and the UK (45%), there is a case for not increasing the tax burden any further in the interest of encouraging consumption and preventing migration of HNIs. At the same time, the low- and mid-income group taxpayers do deserve more tax relief considering that India’s PIT collections have been buoyant despite a low per capita income. There is also a case of linking tax slabs to the inflation index such that it helps maintain real income of taxpayers, thereby preventing inflation from eroding post-tax purchasing power.
There are high expectations that the Budget will be favourable to the smaller taxpayers by providing money in their pockets. While one will need to consider the lower than estimated nominal GDP growth of 10.5% in FY26 as against estimated nominal GDP growth of 9.7% in FY25, the high personal income tax buoyancy at 1.7 should allow for these wishes to be granted.
(Gupta is national tax leader and Mathur is tax director at EY India. The views are personal)
