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CHAPTER – III
ANALYSIS OF REVENUE RECEIPTS AND CAPITAL
RECEIPTS OF THE UNION BUDGETS
The trend and pattern of various revenue items under the union budgets in
India from 1990-91 to 2009-10 were analysed in this chapter. The total revenue
receipts were classified into tax revenue and non-tax revenue. The tax revenue
was further classified into direct and indirect taxes. Under direct taxes, the trend
of personal income tax, corporate income tax and wealth tax were analysed.
Under indirect taxes, union excise duties, custom duties and service taxes were
selected for the analysis since they are the major sources of indirect taxes to the
Union Government and their trend analysis were also analysed. Besides, the
compound growth rates of all these tax items were estimated. In order to find out
the trend values and compound growth rates of all these tax items, linear
regression model and log-linear regression model were employed. Similarly,
they were also employed to analyse the trend and compound growth rates of
capital receipts of the union budgets during the study periods.
An analysis of tax buoyancy and tax elasticity were made. The buoyancy
and elasticity were worked out for the selected direct and indirect taxes. The
discretionary measures taken by the Union Government towards increase the tax
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revenue were also analysed. An attempt was made here to analyse the tax burden
over the study periods. At the end of this chapter, determinants of buoyancy of
direct tax revenue, indirect tax revenue and total tax revenue were analysed by
using multiple regression model. Tax revenue was taken as dependent variable
and growth in manufacturing sector, import, service sector, budget deficit and
grants-in-aid were taken as independent variables.
TREND OF REVENUE RECEIPTS
The union budget in India consists of two broad accounts such as revenue
and capital accounts. Both these accounts have receipts items and expenditure
items. Under the revenue account or revenue budget, current revenue or current
receipts are credited. Revenue receipts comprise of tax revenue and non-tax
revenue. As far as tax revenue is concerned, there are two main sources of taxes
namely direct taxes and indirect taxes. Similarly non-tax revenue consists of
interest receipts from states, union territories, railway capital and other interest
receipts. The revenue from dividends, profits from the public sector
undertakings, revenue from general services, economic services, social services
and fiscal services are credited under the heading of non-tax revenue.
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The following models were employed to anlayse the trend of various
receipts of the Union Government‟s budgets during the study period.
Models Used:
Linear: Y = a + bt [For Average Annual Growth Rate]
Log Linear: Log Y = a + bt [For Compound Growth Rate]
Where
Y – Independent Variable
a – Intercept
b – Trend value
t – Time
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TABLE NO - 3.1
REGRESSION RESULTS OF REVENUE RECEIPTS DURING THE
PERIODS FROM 1990-91 TO 2009-10
Revenue
Items
Average Annual
Growth Rate t R
2
Compound
Growth Rate t R
2
Total
Revenue
Receipts
Y= - 49402.96 +27044.77 t 11.54 0.88
Y = 10.8061 + 0.1245 t
CGR = 13.26 60.86 0.99
Tax
Revenue
Y = - 49451.34+21724.11 t 9.73 0.84
Y =10.4688 + 0.1281 t
CGR = 13.67 32.51 0.98
Non-Tax
Revenue
Y = - 1607.54 + 5598.25 t 16.07 0.93
Y = 9.552 + 0.1143 t
CGR = 12.11 21.02 0.96
Source: Estimated by the Researcher
The table 3.1 presents the trend values of revenue receipts of the union
budgets from 1990-91 to 2009-10. The revenue receipts consist of tax revenue
and non-tax revenue. The value of „b‟ of total revenue receipts was estimated to
be 27044.77. It indicates that the revenue receipts had grown by Rs.27044.77
crores annually from 1990-91 to 2009-10. The average annual growth rates of
tax revenue and non-tax revenue during the study period were found to be
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Rs.21724.11 crores and Rs.5598.25 crores respectively. The value of R2
for the
total revenue receipts was calculated to be 0. 88. This had disclosed the fact that
88 per cent of the variations in total revenue receipts variable were explained by
the independent variable. The values of R2 for the tax and non-tax revenues were
calculated to be 0.84 and 0.93 respectively which meant that the independent
variable was 84 per cent accounted for variations in tax revenue variable and 93
per cent for variations in the non-tax revenue variable respectively.
In the log-linear model analysis, the value of „b‟ for the total revenue
receipts was calculated to be 0.1245. It was calculated as 0.1281 for the tax
revenue and 0.1143 for the non-tax revenue. The measure of goodness of fit of
the model for the total revenue receipts was calculated to be 99 per cent. The
compound growth rate of total revenue receipts over the study period was
calculated to be Rs.13.26 crores and the compound growth rates for tax revenue
and non-tax revenue were estimated to be Rs.13.67 crores and Rs.12.11crores
respectively. The calculated values of „t‟ in both the models were statistically
significant both at 5 per cent and one per cent levels of significance.
From the above analysis it is inferred that the average annual growth rate
of tax revenue was higher than that of the average annual growth rate non-tax
revenue from 1990-91 to 2009-10. It is also inferred that the compound growth
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rate of tax revenue was higher than the compound growth rate of non-tax
revenue during the study period.
The„t‟ test was used to examine whether the growth rate of tax revenue
differed from the growth rate of non-tax revenue during the study period for the
following hypotheses.
Ho: Null Hypothesis: There is no significant difference between growth rates of
tax revenue and non-tax revenue during the study period.
t = X 1 --- X 2 ⁄ √ (S.E of X 1)2 + (S.E of X 2)
2
Where,
X 1 = Average annual growth rate of tax revenue
X 2 = Average annual growth rate of non-tax revenue
S.E of X 1 = Standard error of tax revenue
S.E of X 2 = Standard error of non-tax revenue
t = 21724.11 --- 5598.25 ⁄ √ (2230.76)2 + (348.21)
2
t = 16125.86 / 2257.77
t = 7.14
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Calculated “t” value = 7.14
Table value of “t” = 2.086
Level of significance = 5 per cent
Since the calculated “t” value is higher than that of table value of “t”, the
null hypothesis is rejected. Hence it is concluded that there is a significant
difference between growth rates of tax revenue and non-tax revenue during the
study period.
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70
TREND OF DIRECT TAXES
The direct taxes are significant one in the total tax revenue. Though there
are many direct taxes levied by the Union Government in India, personal income
tax, corporate income tax and wealth tax are the principal direct taxes. The
personal income tax, corporate income tax and wealth tax are considered as
significant since they contribute a greater share in the total direct tax revenue.
Therefore the researcher selected only these direct tax items for analytical
purpose. The trend analysis of personal income tax, corporate income tax and
wealth tax are given in the table 3.2.
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TABLE NO - 3.2
REGRESSION RESULTS OF DIRECT TAXES DURING THE PERIODS
FROM 1990-91 TO 2009-10
Direct
Tax Items
Average Annual
Growth Rate t R
2
Compound
Growth Rate t R
2
Total
Direct
Tax
Revenue
Y= -53946.41+12698.46 t 7.87 0.87 Y= 8.7514 + 0.1878 t
CGR = 20.66 40.05 0.98
Personal
Income
Tax
Y= -21401.063+4603.59 t 8.95 0.81 Y= 6.7517+ 0.2479t
CGR = 28.14 21.88 0.96
Corporate
Income
Tax
Y= -34142.321+8160.64 t 7.02 0.73 Y= 8.5009 + 0.1741 t
CGR = 19.01 22.54 0.96
Wealth
Tax
Y = - 4732. 87 + 22. 62t 4.43 0.79 Y = 3.4310 + 0. 1640 t
CGR = 18. 48 8. 49 0.93
Source: Estimated by the Researcher
The trend values of total direct tax revenue and its major components
such as personal income tax, corporate income tax and wealth tax are shown in
the table 3.2. From that table it was clearly understood that the total direct tax
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revenue from 1990-91 to 2009-10 had increased annually by Rs. 12698.46
crores. The value of R2 for total direct tax revenue was calculated to be 0.87
which had revealed that the independent variable was responsible for about 87
per cent of the variations in „total direct tax revenue‟ variable. The average
annual growth rate of personal income tax was calculated to be Rs. 4603.59
crores. Trends in personal income tax showed that reforms had a favourable
impact on the growth of personal income tax. The major factors for this increase
in revenue responsiveness of personal income tax were reduction in top marginal
rate of personal income tax, reduction in the number of tax slabs, thereby
resulting in the simplification of tax structure, increasing compliance through
wider coverage of tax assesses in terms of PAN, TDS and TIN, increases in
number of tax assesses and high GDP growth rate.
The corporate income tax had increased annually by Rs.8160.64 crores.
The introduction of economic reforms in India led to the arrival of more
multinational corporations and incorporation of more domestic companies. The
newly established companies were brought under the net of corporate income tax
and this increased the revenue of corporate income tax. The measure of goodness
of fit [R2] for the personal income tax was calculated to be 0.81 and 0.73 in the
case of corporate income tax. The wealth tax had annually grown by Rs.22.62
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crores and it was the lowest annual growth rate among the selected direct taxes
in the study.
In the log-linear regression model, the „b‟ value for the total direct tax
was estimated to be 0.1878. The personal income tax, corporate income tax and
wealth tax had their „b‟ values of 0.2479, 0.1741 and 0.1640 respectively. The
R2
values were estimated as 0.98, 0.96, 0.96 and 0.93 for the total direct tax
revenue, personal income tax, corporate income tax and wealth tax respectively
and it clearly showed that the sample regression line had fitted well with the
data. The compound growth rate of total direct tax revenue from 1990-91 to
2009-10 was estimated to be Rs.20.66 crores and that of personal income tax
and corporate income tax were estimated to be Rs.28.14 crores and Rs.19.01
crores respectively during the same study period. It was Rs.18.48 crores for
wealth tax. The„t‟ values were statistically significant both at one per cent and
five per cent levels of significance in all the cases.
This analysis clearly disclosed the fact that the average annual growth rate
of corporate income tax was higher than that of personal income tax and wealth
tax. But the compound growth rate of personal income tax was found to be
higher than that of corporate income tax and wealth tax.
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75
TREND OF INDIRECT TAXES
The contribution of indirect taxes to the total tax revenue is notable one.
Their contribution in the total tax revenue during 1990s was significant. But, in
the recent past, the contribution of direct taxes is greater than that of indirect
taxes in the total tax revenue. The union excise duties, custom duties and service
taxes are the principal tax items under indirect tax revenue. The service taxes
become one of the major shares in the indirect taxes recently. Therefore these
three indirect taxes have been taken for analysis. The trend and pattern of these
taxes are given in the table 3.3.
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TABLE NO - 3.3
REGRESSION RESULTS OF INDIRECT TAXES DURING THE
PERIODS FROM 1990-91 TO 2009-10
Indirect
Tax Items
Average Annual
Growth Rate t R
2
Compound
Growth Rate t R
2
Total
Indirect
Tax
Revenue
Y= 1955.03+9457.49 t 12.26 0.89
Y = 10.3446+0.0971 t
CGR = 10.19
28.18 0.97
Excise
Duties
Y = -2851.57+4951.64 t 15.20 0.92
Y = 9.3819+0.1149 t
CGR = 12.18
20.34 0.95
Custom
Duties
Y = 15577.08+2438.61 t 6.32 0.86
Y = 9.9321+0.0585 t
CGR = 6.02
6.99 0.93
Service
Taxes
Y = 2613. 41+4702. 31 t 7. 15 0.88
Y =7. 1468+0.1075 t
CGR = 11. 07
15.44 0.91
Source: Estimated by the Researcher
The table 3.3 shows the trend analysis of indirect tax revenue and its
major components from 1990-91 to 2009-10. Though there are many tax items
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under the heading of indirect taxes, only the important indirect tax items such as
excise duties, custom duties and service taxes were taken for analysis. From the
above analysis it is inferred that the amount of total indirect tax had grown
annually by Rs. 9457.49 crores. The value of R2
was calculated to be 0.89. It
implied that the independent variable was accounted for 89 per cent variations in
the dependent variable. The excise and custom duties had grown annually by
Rs. 4951.64 crores and Rs. 2438.61 crores respectively. The R2 value for excise
and custom duties were calculated to be 0.92 and 0.86 respectively which meant
that the independent variable had explained for about 92 per cent of the
variations in the excise duties and 86 per cent variations in the custom duties
respectively, which were the dependent variables. The service taxes had grown
annually by Rs.4702.31 crores. The average annual growth rate of excise duties
was found to be higher than that of custom duties and service taxes.
The log-linear regression model shows that the “b” value of excise duties
(0.1149) was higher than the custom duties (0.0585) and service taxes (0.1075).
The „b‟ value of total indirect tax by using this model was found to be 0.0971.
The compound growth rate of total indirect tax revenue was calculated to be
Rs.10.19 crores. The compound growth rate of excise duties and custom duties
were estimated to be Rs.12.18 crores and Rs.6.02 crores respectively. It was
Rs.11.07 crores for the service taxes. The values of R2 for total indirect tax
78
revenue, excise duties, custom duties and the service taxes were calculated to be
0.97, 0.95, 0.93 and 0.91 respectively which revealed the measure of goodness
of fit of the model.
The„t‟ test was used to examine whether the growth rate of total direct tax
revenue differed from the growth rate of total indirect tax revenue during the
study period for the following hypotheses.
Ho: Null Hypothesis: There is no significant difference between growth rates of
total direct tax revenue and total indirect tax revenue during the study period.
t = X 1 --- X 2 ⁄ √ (S.E of X 1)2 + (S.E of X 2)
2
Where,
X 1 = Average annual growth rate of total direct tax revenue
X 2 = Average annual growth rate of total indirect tax revenue
S.E of X 1 = Standard Error of total direct tax revenue
S.E of X 2 = Standard Error of total indirect tax revenue
t = 12698.46 --- 9457.49 ⁄ √ (161.30)2 + (771.04)
2
t = 3240.97 / 787.73
t = 4.11
Calculated “t” value = 4.11
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Table value of “t” = 2.086
Level of significance = 5 per cent
Since the calculated„t‟ value is higher than that of table value of “t”, the
null hypothesis is rejected. Hence it is concluded that there is a significant
difference between growth rates of total direct tax revenue and indirect tax
revenue during the study period.
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TREND OF CAPITAL RECEIPTS
The capital account of the union budget deals with the long term receipts
and expenditure. Capital receipts includes items such as recoveries of loans and
advances from the states and union territories, market borrowings, small savings,
internal debts and external debts. The capital receipts items such as loan
recovery, borrowings and other capital receipts were taken for analysis. The
trend analysis of these capital receipts are given in the table 3.4.
TABLE NO - 3.4
REGRESSION RESULTS OF CAPITAL RECEIPTS DURING THE
PERIODS FROM 1990-91 TO 2009-10
Capital
Receipts
Items
Average Annual
Growth Rate t R
2
Compound
Growth Rate t R
2
Total
Capital
Receipts
Y= -9848.77+14307.95 t 7.39 0.75
Y = 10.44+0.1125 t
CGR = 11.90
12.08 0.89
a.Loan
Recovery
Y = 6448.87+800.66 t 1.13 0.67
Y = 8.93 + 0.0217t
CGR = 2.19
0.62 0.81
b.Borrowings
Y =-51360.34+13216.93 t
5.05
0.88
Y = 8.85+0.1852 t
CGR = 20.35
9.54
0.83
c.Other
Receipts Y = 37566.40+ 138.98t 0.16 0.82
Y = 10.82-0.0519 t
CGR = -5.06
-1.28 0.84
Source: Estimated by the Researcher
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The table 3.4 depicts the trend analysis of capital receipts of the union
budgets of India from 1990-91 to 200-10. Loan recovery, borrowings and other
receipts are the major components of capital receipts. As far as total capital
receipts during the study period are concerned, it had grown by Rs.14307.95
crores annually. The value of R2 for the total capital receipts was calculated as
0.75 which showed the measure of goodness of fit of the trend line. Among these
three items, the average annual growth rate of borrowings was higher
(Rs.13216.93 crores) than the loan recovery and other receipts. The amount of
loan recovery had grown annually by Rs.800.66 crores where as other receipts
had grown annually just by Rs.138.98 crores. The values of R2 for the loan
recovery and other receipts were found to be 0.67 and 0.88 respectively. The
values of „t‟ for total capital receipts and borrowings were statistically significant
both at one and five per cent levels of significance.
In the log-linear regression analysis, the value of „b‟ for total capital
receipts was found to be 0.1125 and these values for the loan recovery,
borrowings and other receipts were 0.0217,0.1852 and -0.0519 respectively. The
compound growth rate of total capital receipts during the study period was
estimated to be Rs.11.90 crores. The compound growth rate of loan recovery was
calculated as Rs.2.19 crores and Rs.20.35 crores for borrowings. But, the
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compound growth rate of other receipts was calculated to be negative (-5.06). It
was found that the average annual growth rate of other receipts had positive
value but its compound growth rate was found to be negative.
It was also found that the average annual growth rate of borrowing was
higher than that of loan recovery and other receipts. From this, it is inferred that
the compound growth rate of borrowing was higher when compared to loan
recovery and other receipts.
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TABLE NO - 3.5
REGRESSION RESULTS OF TOTAL RECEIPTS DURING THE
PERIODS FROM 1990-91 TO 2009-10
Receipts
Average Annual
Growth Rate t R
2
Compound
Growth Rate t R
2
Total
Receipts
Y= -59251.74+41352.72 t 11.34 0.87 Y = 11.333+0.1206 t
CGR = 12.82 41.32 0.96
Source: Estimated by the Researcher
The table 3.5 exhibits the trend analysis of total receipts of the union
budgets during the study period. The total receipts of the union budget during the
study period had grown on an average by Rs.41352.72 crores every year. The
value of R2 was estimated as 0.87. It is understood that the independent variable
in the model was accounted for 87 per cent variations in the total receipts
variable. The value of „t‟ for total receipts was estimated to be 11.34 and it was
statistically significant both at one per cent and five per cent levels of
significance. The revenue receipts had grown much faster than the capital
receipts.
The compound growth rate of the total receipts was calculated as
Rs.12.82 crores. The measure of goodness of fit of the model for total receipts
was shown as 0.96 or 96 per cent. The value of „t” for the total receipts was
statistically significant both at five per cent and one per cent levels of
significance.
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85
ANALYSIS OF TAX BUOYANCY AND TAX ELASTICITY
This section deals with the analysis of tax buoyancy and tax elasticity of
selected direct and indirect tax items of the Union Government in India during
the post reform period. This section has been divided into two parts. The first
part presents the analysis of tax buoyancy and the second part deals with the
elasticity and tax measures taken by the Union Government during the period of
study. As far as buoyancy of different taxes is concerned, taxes are classified
into direct taxes, indirect taxes and total tax revenue. The same classification is
adopted to analyse the elasticity and discretionary measures taken by the Union
Government in India as tax efforts.
Tax elasticity and buoyancy estimates are the dynamic tools for
measuring the tax performance. The main objective of this analysis is to measure
the elasticity and buoyancy of various taxes of the Union Government in India
and to ensure whether or not the tax system in India is elastic. Tax revenue may
change due to a variety of factors such as changes in income, changes in tax
rates, tax base, changes in efficiency of tax assessment and collection. The
responsiveness of tax revenue to such changes explained with the help of tax
buoyancy and elasticity in this study.
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TAX BUOYANCY AND ELASTICITY
Tax buoyancy refers to changes in actual tax revenue due to changes in
income as well as due to the changes in discretionary measures such as tax rates
and tax bases adopted by the authorities. But the tax elasticity is defined as a
percentage change in adjusted tax revenue to a percentage change in income that
gives the nominal gross national product. This distinction is very useful in
analyzing and evaluating whether future revenues would be sufficient to meet
the resource needs without changing the rates or bases of the existing tax. To
measure tax elasticity, historical tax series must be adjusted so as to eliminate
the effects of tax revenues from discretionary changes. If there is no change in
the tax rates and tax base, the buoyancy would be the same as elasticity.
It is very useful to analyse the buoyancy and elasticity of taxes. A number
of changes have taken place in the taxation front in India in recent years. Income
tax rates have been changed year by year. Slabs and tax rates of various taxes
have been revised frequently. Many tax reforms have been implemented in the
recent years. The analysis of tax buoyancy and elasticity is beneficial for tax
planning and fiscal projection in the present Indian context.
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CALCULATION OF TAX BUOYANCY AND ELASTICITY
The following formula is used to estimate tax buoyancy. It is the ratio of
proportionate change in tax revenue to the relative change in gross domestic
product as follows.
∆ T / T
Buoyancy = -----------------------
∆ Base / Base
Where,
“T” is tax revenue and “∆ T‟ is change in actual tax revenue over the period of
study. Gross Domestic Product (GDP) is the Base and ∆ Base refers to changes
in Gross Domestic Product (GDP).
∆ T* / T*
Elasticity = -----------------------
∆ Base / Base
Where, ∆ T* is change in tax revenues adjusted for the estimated impact of
changes in the tax system during the period of study.
But, the present study has employed time series regression approach for the
measurement of buoyancy and elasticity of various taxes.
88
The tax buoyancy and elasticity is calculated using the following
regression equation:
Ln T = ln α + β ln Y + u
Where, „T‟ is dependent variable i.e., individual tax item. The tax revenues
have to be adjusted to calculate elasticity of taxes and the actual tax revenues can
be taken as it is for the calculation of the tax buoyancy.
α – intercept
β - buoyancy co-efficient of individual tax item
Y – Gross Domestic Product (GDP)
u - Error term
The functional form of the least square equation for computing tax to base
[GDP] in order to estimate buoyancy and elasticity is the log-linear or double log
specification such as:
Ln T = α + β log Y + u
Where,
T – Tax revenue [actual tax revenue in case of tax buoyancy and adjusted tax
revenue in case of tax elasticity]
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α – intercept
β - Elasticity or buoyancy coefficient of individual tax item
Y – Tax base
u - Error term
Tax revenue usually changes due to discretionary measures such as changes
in tax rates and tax net expansion. It is needed to separate the changes in revenue
emanating through the discretionary measures from automatic measures to
estimate tax elasticity. This is the way to distinguish tax elasticity from tax
buoyancy.
The proportional adjustment procedure which requires calculation of the
revenue implications of discretionary measures has been applied in this study to
adjust the time series tax revenue data. The actual observed data were adjusted
for discretionary changes to remove the estimated revenue impact through
discretionary measures. The resulting series were converted to the first years‟
basis by adjusting the year to year changes by the ratio of the tax yield on the
basis of the first year rates to the actual tax yield.
90
EMPIRICAL RESULTS OF TAX BUOYANCY
The buoyancy co-efficient was estimated for the selected direct taxes,
indirect taxes and total tax revenue during the study period. The major direct
taxes were included in this study are personal income tax, corporate income tax
and wealth tax. Excise duties, custom duties and service taxes were included in
the indirect tax revenue. The coefficients for these taxes were estimated for the
period from 1990-91 to 2009-10.The results of estimated tax buoyancies for
direct taxes, indirect taxes and total tax revenue are given in the table 3.6.
TABLE NO - 3.6
BUOYANCY OF DIRECT TAXES FROM 1990-91 TO 2009-10
Direct Taxes
a - Value Buoyancy Co-
efficient „b‟ R
2
t – Value
Personal Income Tax
10.1544 1.9611 0.92 18.83
Corporate Income Tax
7.6180 0.9632 0.94 23.51
Wealth Tax
9.7013 -0.4305 0.87 13.45
Total Direct Taxes
7.7309 1.1027 0.88 38.23
Source: Estimated by the Researcher
The table 3.6 presents the buoyancy coefficients of various direct taxes of
the Union Government in India during the study period.
91
Personal Income Tax
The value of buoyancy coefficient of the personal income tax during the
study period was estimated to be 1.9611 which revealed that a one per cent
increase in gross domestic product led to 1.96 per cent increase in the personal
income tax revenue. The Union Government of India levied a number of taxes
on income and wealth and the personal income tax is very important among
them. As far as buoyancy coefficient of the personal income tax in India from
1990-91 to 2009-10 is concerned, it was positive and fairly buoyant. But the base
of income tax in India was narrow. The number of income tax payers in India
was less than 3 per cent of the total population. In spite of the Union
Government had been rising the personal income tax slabs every year, the base
of income tax was narrowed by a large number of deductions and reliefs allowed
at different times. Of them, the most important were saving in government
sponsored schemes, mutual fund insurance schemes, and fringe benefits
available to both in public and private sectors and charitable contribution.
Besides, in order to increase exports, the export profit was exempted from the
income tax. Tax payers of higher income and middle income groups in India
benefited from these deductions and the tax base became narrow. The value of
R2 was estimated to be 92 per cent. It revealed that the sample regression line
was fitted very well with the data. The value of „t‟ was estimated to be 18.83
92
which was statistically significant both at 5 per cent and 1 per cent levels of
significance.
Corporate Income Tax
The corporate income tax is levied on the incomes of the companies and
corporations. The buoyancy coefficient of the corporate income tax in India
during the study period was calculated as 0.9632.It was positive and more
buoyant. The present study found that a one per cent increase in the gross
domestic product led to 0.96 per cent increase in the corporate income tax
revenue. Though the corporate incomes were being taxed at a flat rate, there
were provisions for various kinds of rebates and exemptions. This is because the
Union Government gave these exemptions in order to develop the industrial
sector. The Chelliah committee recommended that the corporate income tax
should be brought down to 40 per cent. The corporate income tax rate had been
reduced from 35 per cent to 30 per cent in the budget for 2005-2006 and further
it reduced in the budget for 2009-10.The value of R2 for the corporate income
tax was estimated as 0.94 or 94 per cent. It implied that the independent variable
was accounted for 94 per cent variations in the corporate income tax variable.
The value of „t‟ was also estimated and found to be 23.51 which was statistically
significant both at one and five per cent levels of significance.
93
Wealth Tax
Among the various direct taxes of the Union Government of India, wealth
tax was a minor source of revenue. The buoyancy coefficient value of the wealth
tax from 1990-91 to 2009-10 was found to be -0.4305, which disclosed the fact
that a one per cent increase in the gross domestic product had resulted in a 0.43
per cent decrease in the wealth tax revenue. Agricultural land, balances of
provident fund and life insurances had been exempted from the wealth tax.
Besides, the government also exempted productive assets like shares, bonds,
bank deposits. Therefore, the wealth tax revenue was minor source of revenue to
the Government during the study period and it has negative buoyancy
co-efficient. The value of „t‟ was calculated as 13.45 which was statistically
significant both at one and five per cent levels of significance.
Total Direct Taxes
From the table 3.6, the buoyancy coefficient of the total direct taxes of the
Union Government of India during the study period was calculated as 1.1027.
From this, it is inferred that a one per cent increase in the gross domestic product
resulted in 1.1027 per cent increase in the total direct taxes. The value of
measure of goodness of fit [R2] was estimated to be 88 per cent and the„t‟ value
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(38.231) showed that it was statistically significant both at one per cent and five
per cent levels of significance.
Among the buoyancy of direct taxes of the Union Government in India from
1990-91 to 2009-10, the personal income tax was fairly buoyant and the
corporate income tax was found to be more buoyant. It was also found that the
wealth tax was least buoyant and insignificant since the buoyancy coefficient of
wealth tax was negative.
95
TABLE NO - 3.7
BUOYANCY OF INDIRECT TAXES FROM 1990-91 TO 2009-2010
Indirect Taxes
a - Value Buoyancy Co-
efficient “b” R
2
t – Value
Union Excise Duties
4.0415 0.9846 0.93 16.57
Custom Duties
-1.7095 0.7339 0.77 7.84
Service Tax*
2.1376 0.8962 0.88 12.32
Total Indirect tax
Revenue
0.7962 0.8028 0.97 28.77
Source: Estimated by the Researcher
* Service Tax was introduced in 1994 and it has been levied from 1994 onwards.
The table 3.7 depicts the buoyancy coefficients of union excise duties
custom duties and service taxes from 1990-91 to 2009-10.
Union Excise Duties
The buoyancy coefficient of union excise duties of the Union Government
in India was estimated to be 0.9846. It was positive and more buoyant. It is very
96
clear from this estimation that a one per cent increase in gross domestic product
had resulted in 0.9846 per cent increase in the union excise duties during the
study periods. Revenue collection from the excise duties had registered a really
spectacular increase during the planning periods. Though the Union Government
had levied heavy excise duties on luxury commodities, revenue proceeds from
them were not much. Major revenue collection was from excise duties on
textiles, sugar, tea, tobacco and cement. Therefore, levying of union excise
duties on an increasing scale has resulted in the dilution of the progressivity of
the tax structure. Certain concessions were given to small scale industries in the
excise duty structure of the country in recognition of the employment potential.
The calculated value of R2 is 0.93 which meant that about 93 per cent of the
variations in the union excise duties variable had been explained by the
independent variable. The„t‟ value was calculated to be 16.57 which was
statistically significant both at one per cent and five per cent levels of
significance.
Custom Duties
Custom duties in India are levied for two purposes, to raise income to the
Government and another to regulate foreign trade of the country. The buoyancy
coefficient of custom duties during the study period was estimated to be 0.7339.
97
From this estimation, it is inferred that 0.73 per cent increase in the custom
duties was due to a one per cent increase in the gross domestic product. There
had been considerable increase in revenue from custom duties because of heavy
imports of iron and steels, chemicals, drugs and medicines, fertilizers and
petroleum products. The measure of goodness of fit of the model was calculated
as 0.77. The value of „t‟ was statistically significant both at one and five per cent
levels of significance. In the last few years of the present study, the Union
Government of India steadily reduced and rationalized import duties. Custom
duties were significant in India‟s tax structure and it is the largest sources of tax
revenue to the Union Government after corporate income tax and excise duties.
Service Taxes
The service taxes in India were introduced in the year 1994 and its
buoyancy coefficient was found to be 0.8962. It implied that the service tax
revenue increase by 0.89 per cent on account of increase in the gross domestic
product by one per cent. The value of R2
was estimated to be 88 per cent which
showed that the independent variable was the cause of 88 per cent variations in
the service tax revenue. The numbers of services were included in the service tax
net grew year by year.
98
Total Indirect Taxes
It is very clear that the change in the total indirect tax on account of changes
in the national income is very significant. A one per cent change in the India‟s
gross domestic product led to 0.8028 per cent increase in the total indirect tax
revenue. The value of R2 was calculated to be 97 per cent and the„t‟ value was
statistically significant at one and five per cent levels of significance. As far as
indirect taxes are concerned, excise duties and custom duties are major principal
taxes. They are principal taxes among all other taxes in terms of revenue
collection. This analysis revealed that both custom duties and excise duties are
more buoyant. There was no any drastic difference in the tax buoyancy of
custom duties and excise duties. It is clear that custom duties are more important
than that of excise duties during the pre-economic reforms, but it has been
reduced. Even then, it is the third largest source of tax revenue to the Union
Government after corporate income tax and excise duties.
99
TABLE NO - 3.8
BUOYANCY OF TOTAL TAX REVENUE FROM 1990-91 TO 2009-10
Tax Item
a - Value Buoyancy
Co-efficient „b‟ R
2
t – Value
Total Tax Revenue
3.6656 0.9143 0.98
29.78
Source: Estimated by the Researcher
The table 3.8 presents the buoyancy coefficient of the total tax revenue of
the Union Government from 1990-91 to 2009-10. As a whole, the buoyancy
coefficient of the total tax revenue of the Union Government was estimated to be
0.9143. The total tax revenue had increased by 0.9143 per cent on account of a
one per cent increase in the gross domestic product. Among the various direct
and indirect taxes of the Union Government in India, personal income tax and
union excise were found to be fairly buoyant than other taxes. This was followed
by corporate income tax and custom duties. The major cause of concern is
wealth tax. It was negatively buoyant and found an insignificant one. The
buoyancy coefficient of total direct tax was estimated to be higher (1.1027) than
100
the buoyancy coefficient of total indirect taxes (0.8028). It revealed that direct
taxes are more buoyant than that of indirect taxes.
Personal income tax, corporate income tax, custom duties, union excise
duties and service taxes are accounted for almost total tax proceeds of the Union
Government in India. Custom duties had remained the major source of tax
revenues of the Union Government for a long time. The importance of custom
duties as a source of revenue started declining from the time the Government
decided to give protection to industries during the plan periods. The Union
Government attempted to expand the tax base of excise duties due to some
progress in the industrial sector. There had been huge increase in all these tax
revenues year by year. This huge increase in tax revenues reflects the broadening
of the tax base, better tax administration and rise in prices and incomes due to
general inflationary pressure and consequent increase in the tax revenues.
TAX ELASTICITY
India‟s tax structure is quite extensive. Almost every conceivable direct
and indirect tax is levied in India. India is one of the modestly taxed countries.
The built-in flexibility and buoyancy are the main features of the tax structure.
The taxation system is said to have built-in flexibility, if the elasticity of various
taxes are high.
101
TABLE NO - 3.9
ELASTICITY OF DIRECT TAXES FROM 1990-91 TO 2009-10
Direct Tax Items Value of Elasticity Direct Tax Items
Value of
Elasticity
Personal Income Tax
1.1305 Wealth Tax
-0.3516
Corporate Income Tax
0.9552 Total Direct Tax
Revenue
0.5278
Source: Estimated by the Researcher
Personal Income Tax
The table 3.9 exhibits the elasticity of personal income tax during 1990-
91 to 2009-10.Regarding the elasticity of personal income tax, it was estimated
to be 1.1305. Since the elasticity of personal income tax was high and more than
one, there was existence of built-in flexibility. It implied that a one per cent
increase in the gross domestic product resulted in a 1.1305 per cent in increase in
the personal income tax.
Corporate Income Tax
The elasticity of corporate income tax during the study periods was
calculated as 0.9552. It is inferred from this value that the elasticity of the
corporate income tax was very close to one and there was also presence of built-
102
in flexibility in this tax. The corporate income tax increased by 0.9552 per cent
on account of a one per cent increase in the gross domestic product.
Wealth Tax
The elasticity of wealth tax was found to be negative (-0.3516). It was
insignificant since it had negative elasticity. From this value it is understood that
the revenue from the wealth tax decreased by 0.35 per cent for one per cent
increase in the gross domestic product. It disclosed the fact that the revenue from
wealth tax had been inelastic over the study period.
Total Direct Taxes
This analysis not only gives the elasticity of personal income tax, corporate
income tax, wealth tax but it also gives elasticity of total direct tax revenue. The
elasticity of total direct tax revenue during the study period was calculated as
0.5278. It implied that one per cent increase in the gross domestic product had
resulted in 0.52 per cent increase in the total direct tax revenue. Among the
various direct taxes, there was presence of built –in flexibility in the case of
personal income tax and followed by the corporate income tax which was more
elastic and also there was presence of built-in flexibility. The major cause of
concern was wealth tax because of its negative elasticity over the study period
and was an insignificant one.
103
TABLE NO - 3.10
ELASTICITY OF INDIRECT TAXES AND TOTAL TAX REVENUE FROM
1990-91 TO 2009-10
Indirect Tax Items
Elasticity
Union Excise Duties
0.8312
Custom Duties
0.6781
Service Taxes
0.6037
Total Indirect Taxes
0.5121
Total tax revenue
0.7439
Source: Estimated by the Researcher
The table 3.10 portrays the elasticity of various indirect taxes in India
from 1990-91 to 2009-10. There are three indirect taxes, namely, union excise
duties, custom duties and service taxes, taken for analysis since they have major
contribution in India‟s indirect tax revenue.
104
The elasticity of the union excise duties was calculated to be 0.8312 and
which meant that a one per cent increase in the gross domestic product had
resulted in 83 per cent increase in the union excise duties. The union excise
duties were found to be more elastic since the value of its elasticity was
estimated to be 0.8312. Therefore it is inferred that there was presence of built-
in-flexibility to some extent in the union excise duties.
The elasticity co-efficient of custom duties was calculated as 0.6781. It
measured that there was somewhat built-in-flexibility. From this analysis, it is
inferred that a one per cent increase in the gross domestic product resulted in
0.67 per cent increase in the custom duties. The service taxes increased by
0.6037 per cent when there is increases in gross domestic product by one
per cent.
The elasticity coefficient of total indirect tax of India during the study
period was calculated as 0.5121 which implied that a one per cent increase in the
gross domestic product resulted in 0.51 per cent increase in the total indirect tax
revenue. Therefore, it is found that the total indirect tax was somewhat elastic
and there was presence of built-in-flexibility. As a whole, among indirect taxes,
union excise was more elastic than that of custom duties and service taxes. The
elasticity co-efficient of the total tax revenue was calculated as 0.7439.
105
Two significant developments in the last few years of the study in terms
of the composition of taxes had been the growth in direct tax revenues,
particularly personal income tax, corporate income tax, and service tax revenues.
Union excise duties had traditionally been the single largest tax revenue earner.
In 2009-10, owing to the fiscal stimulus package which envisaged significant
reduction in excise duties and a demand slowdown, union excise duties declined
substantially.
DISCRETIONARY MEASURES TAKEN BY THE GOVERNMENT
The government of India proposed many tax measures from time to time.
These proposals were intended to review demand, promote investment,
accelerate economic growth and enhance productivity. It also aimed at widening
tax base, rationalization and simplification of tax structure. The slab rates for the
union taxes were modified in every budget. Government also appointed many
committees to reform the tax structure. These measures were very useful to
enhance tax revenue and improve the tax structure. But, the efficiency of tax
measures taken by the Union Government should be analysed. So, the present
study analysed the efficiency of discretionary measures taken by the
Government towards many direct and indirect taxes. The details of this analysis
are given in the table 3.11
106
TABLE NO - 3.11
DISCRETIONARY MEASURES TAKEN BY THE GOVERNMENT
TAX ITEMS BUOYANCY ELASTICITY DIFFERENCE
Personal Income tax 1.9611 1.1305 0.8306
Corporate
Income tax 0.9632 0.9552 0.008
Wealth tax -0.4305 -0.3516 -0.0789
Union Excise Duties 0.9846 0.8312 0.1534
Custom Duties 0.7339 0.6781 0.0558
Service Taxes 0.8962 0.6037 0.2925
Total Direct Taxes 1.1027 0.5278 0.5749
Total Indirect Taxes 0.8028 0.5121 0.2907
Total Tax Revenue 0.9143 0.7439 0.1704
Source: Estimated by the Researcher
The table 3.11 depicts the tax efforts undertaken by the Union
Government to increase the tax revenue. The tax efforts or discretionary
107
measures were taken by the Union Government to boost the tax revenue. It is the
difference between the tax buoyancy and tax elasticity.
As far as the personal income tax is concerned, the difference between
the tax buoyancy and tax elasticity was found to be 0.8306. This revealed that
the discretionary measures taken by the Government towards personal income
tax was more effective and there had been increasing trend in the personal
income tax over the period of study. In the case of corporate income tax and
wealth tax, the differences between the tax buoyancy and tax elasticity were
found to be very low and negative respectively. Therefore, the measures taken
by the Union Government to increase the corporate income tax and wealth tax
during the study period were not effective.
Regarding union excise and customs duties, the difference values between
the tax buoyancy and tax elasticity were calculated as 0.1534 and 0.0558
respectively. This revealed that there had been positive impact of government
efforts to increase revenue from excise and customs duties. Measures taken by
the Union Government towards increase the service taxes were also estimated
and it was found to be 0.2925. Recently, more number of services was included
in the service taxes. Among the selected direct and indirect taxes, personal
income tax, custom duties, excise duties and service taxes have positive impact
108
on the efforts taken by the Union Government. The discretionary measures were
found to be somewhat effective in the case of corporate income tax and not
effective in the case of wealth tax.
As a whole, the tax efforts taken by the Union Government in India
was effective. Its efforts were more positive in the case of both direct and
indirect taxes. There had been a lot of tax reforms taken by the Union
Government. One of the most important reasons for the tax reforms in India had
been to evolve the tax structure to meet the requirements of market economy.
Regarding the personal income tax, the most drastic and visible changes had
been in the reduction of tax rates. Besides exceptions, the number of tax rates
was reduced. At the same time the exemption limit was raised. In addition to
that, saving incentives were given by exempting investment in small savings and
provident funds. Self – employed were also exempted. In the case of corporate
income tax, the tax rates progressively reduced on both domestic and foreign
companies. Moreover, depreciation allowances and exemptions for exporters,
generous tax holidays and preferences were given for investment in various
activities. As many corporate entities took generous advantage of all these tax
preferences, there had been number of zero-tax companies. In the case of custom
duties, there had been drastic reduction in both the average and peak tariff rates
and considerable simplification and rationalization of union excise duties.
109
DETERMINANTS OF TAX BUOYANCY
The performance of various taxes was analysed on the basis of tax
elasticity and buoyancy. The estimation of tax buoyancy and elasticity are
dynamic tools for measuring the tax performance. The degree of responsiveness
of tax revenue helps the government to make more precise forecast on revenue in
order to recover fiscal management. There are many variables that determine the
tax buoyancy in India. The present study has analysed the determinants of
buoyancy of direct tax, indirect tax and total tax.
There are five independent variables were included in this model. They are
manufacturing sector, import sector, service sector, budget deficit and grants-in-
aid. The present study analysed the effects of growth in these sector on the
buoyancy of tax revenue.
In order to analyse the determinants of tax buoyancy the following
regression model was used.
b = β0 + β1 X1+ β2 X2 + β3 X3 + β4 X4 + β5 X5 + u
Where,
110
b -Buoyancy of the taxes [total tax revenue, direct tax revenue and indirect tax
revenue]
X1 -- Manufacturing sector
X2 -- Import
X3 -- Service sector
X4 -- Budget deficit
X5 --- Grants-in-aid
u --- Disturbance term.
111
TABLE NO - 3.12
DETERMINANTS OF BUOYANCY OF DIRECT TAXES
Variables b – Value Standard Error t – Value
Constant -7836.917 5662.8699 -1.384
Manufacturing
Sector 0.4865 0.262547 2.711*
Import 0.0031 0.181917 4.494*
Service Sector 0.4917 0.248995 7.891*
Budget Deficit 0.6428 0.175459 -0.0819
Grants -in- aid -0.0736 0.007741 9.509*
R2 = 92
Source: Estimated by the Researcher
* Statistically significant at one per cent and five per cent levels of significance
The table 3.12 depicts the determinants of buoyancy of direct taxes of
the Union Government of India. There are five independent variables such as
manufacturing sector, import, service sector, budget deficit and grants-in-aid
were included in this model. If there is no growth and the values of growth rates
of all these independent variables are assumed to be zero, the direct tax revenue
would decrease by Rs.7836.917 crores. The growth in manufacturing sector was
112
positively related to direct tax collection. It is inferred from this analysis that if
there is an increase in growth of manufacturing sector by 1 per cent, the direct
tax also increases by 0.48 per cent. The co-efficient of growth in import is
insignificant in this model. This is because the growth of imports affects only
the indirect tax such as import duties and custom duties. But it was positive
since some sort of income tax is levied on imports. The co-efficient of growth of
service sector was positive and significant which indicated the banking and
financial sector are developing and dominating with large significant impact on
direct tax buoyancy. The direct tax revenue was increased by 0.49 per cent on
account of the service sector‟s growth by 1 per cent. The co-efficient of growth
of budget deficit is positive and significant which shows that as budget deficit
increase, the government increases their fiscal efforts to reduce this budget
deficit by imposing additional direct taxes. If the budget deficit increases by
1 per cent, the direct tax collection also increases by 0.64 per cent. But, the
growth in grants-in-aid is negatively related to direct tax buoyancy. The direct
tax collection decreases by 0.07 per cent, if there is an increase in grants-in- aid
by 1 per cent. This is because, the flow of foreign grants reduces local resource
mobilization and it is negative impact on tax collection. The value of R2 was
calculated to be 92 which revealed that the included independent variables are
92 per cent accounted for variations in buoyancy of direct taxes.
113
TABLE NO - 3.13
DETERMINANTS OF BUOYANCY OF INDIRECT TAXES
Variables b – Value Standard Error t – Value
Constant 6374.401 4371.9710 1.471
Manufacturing
Sector 0.44321 0.341518 3.7815*
Import 0.39563 0.194371 2.3415*
Service Sector 0.21351 0.223167 9.9145*
Budget Deficit 0.151780 0.138451 3.4183*
Grants -in- aid -0.04312 0.048194 -0.7914
R2 = 96
Source: Estimated by the Researcher
* Statistically significant at one per cent and five per cent levels of significance
The table 3.13 portrays the determinants of buoyancy of indirect tax
revenue and the same independent variables that were used as determinants of
buoyancy of direct tax revenue were also used as independent variables in this
model. From this analysis it is inferred that the buoyancy of indirect tax was
114
positively influenced by growth in manufacturing sector, import, and service
sector and budget deficit. The grants-in-aid has a negative impact on the
buoyancy of indirect tax revenue.
If there is an increase in the growth of manufacturing sector by 1 per
cent, the buoyancy of indirect tax revenue also increases by 0.44 per cent. This
is followed by import which is accounted for 0.39 per cent increase in indirect
tax buoyancy, if there is an increase in import by 1 per cent. Similarly, increase
in the growth of service sector and budget deficit by 1 per cent each resulted in
increase in indirect tax buoyancy by 0.21 per cent and 0.15 per cent respectively.
There was negative relationship between the grants-in-aid and the buoyancy of
indirect tax revenue. If there is an increase in foreign aid and grants, the
government reduces its fiscal efforts to mobilize resources. Higher the
grants-in-aid, larger will be the reduction of fiscal efforts to mobilize financial
resources in the form of indirect taxes. The value of R2 was calculated to be 96
which meant that the independent variables included in this model are 96 per
cent accounted for variations in the buoyancy of indirect tax revenue. It revealed
the measure of goodness of fit of the regression equation.
115
TABLE NO - 3.14
DETERMINANTS OF BUOYANCY OF TOTAL TAXES
Variables b – Value Standard Error t – Value
Constant 8437.704 6034.18 1.4874
Manufacturing 0.33701 0.31471 0.948
Import 0.32321 0.1639 3.475*
Service Sector 0.29125 0.41829 6.713*
Budget Deficit 0.10175 0.04183 3.189*
Grants -in- aid -0.5121 0.076132 -6.107
R2 = 94
Source: Estimated by the Researcher
* Statistically significant at one per cent and five per cent levels of significance
The table 3.14 shows determinants of buoyancy of total tax revenue of the
Union Government. It showed that growth in manufacturing and import sectors
had positive values and significant impact on buoyancy of total tax revenue
which showed that with the increase in growth of import tax, revenue collection
increases through import duties, tariff, and sales tax on import stage and
116
withholding income tax at import stage. The growth in manufacturing sector
increased tax collection through excise duties and corporation tax. Budget deficit
was a key problem in Indian public finance and as the budget deficit increased
the fiscal effort also increased for more collection of taxes. In this model, the
co-efficient of budget deficit showed significant and positive signs. Whereas the
co-efficient of grants-in-aid was negative that showed the increase in flow of
foreign grants was the cause of the reduction in the fiscal effort for domestic
resource mobilization. Co-efficient of service sector was found to be positive
and significant. After 1990s, financial reforms and better tax administration was
the cause of improved tax collection from the service sector in India.
The value of R2 was found to be 94 and it measured goodness of fit of the
model. The independent variables included in this analysis are 94 per cent
accounted for changes in the tax buoyancy of total tax revenue.
Agricultural sector was not included as one of the independent variable in
determining the buoyancy of direct tax revenue, indirect tax revenue and total
tax revenue. Agricultural sector was exempted from tax collection and it was
insignificant in determining the tax buoyancy in India. To conclude, growth in
import and manufacturing sector had positive impact on growth of tax collection.
The growth in service sector had also a positive impact on tax buoyancy.
117
Increase in budget deficit positively influenced the tax collection by demanding
more resource mobilization from the Government and at the same time the
growth in grants was negatively influenced the tax collection.
PROGRESSIVITY OF INDIAN TAX SYSTEM
On account of increasing state activities the amount of public expenditure
had been increasing. It is necessary to secure adequate amount of public revenue
to finance its expenditure. There are two broad sources of funds are available to
the Government. They are tax and non-tax sources. But, the great bulk of
revenue comes from taxation. This is the chief source of income to the
Government. The tax system consists of many direct and indirect taxes. The tax
system should be progressive in nature. A tax system is said to be progressive, if
the percentage of income paid through taxes increases with an increase in
income. It is proportional, if the ratio of the tax revenue to the income remains
the same regardless of changes in the size of the income. The tax system is
regressive, if the ratio of the taxes paid to an increase in income becomes lower
with higher incomes than with lower incomes.
In order to test the progressivity of the Indian tax system, the following
hypotheses were formulated.
118
Null Hypothesis [Ho]: Indian tax system is not progressive one
In order to find out the progressivity of Indian tax system, the following
double log model was employed.
Log [ T/Y]=log a + b log y + u
Where,
T - Tax revenue
Y - Gross domestic product.
U - Disturbance term
„a‟ and „b‟ are constant.
In the above model, the value of „b‟ reveals the progressivity of the tax
system. The progressivity of the tax system is known by the following
information.
If b > 1 Progressive
If b = 1 Proportional
If b < 1 Regressive
119
TABLE NO - 3.15
PROGRESSIVITY OF INDIAN TAX SYSTEM
a- Value b-Value t - Value R2 - Value Standard Error
0.0085 0.0054 2.99* 0.56 0.0025
Source: Estimated by the Researcher
* Statistically significant at one per cent and five per cent levels of significance
The table 3.15 shows the progressivity of tax system in India. From this
analysis, the value of „b‟ was estimated to be 0.0054 which is less than one.
Therefore, it is inferred that the tax system in India is regressive one. The value
of„t‟ was calculated as 2.99 which was statistically significant both at 5 per cent
and one per cent levels of significance.
STABILITY OF TAX REVENUE
There had been a lot of changes in the tax bases, slabs and other
discretionary measures taken by the Union Government towards tax revenue
during the post reform period in India. Apart from this, there had been
fluctuations in the economic activities over the period of time. Under these
circumstances, there were fluctuations in the collection of various taxes. The tax
stability analysis was carried out in order to analyse the stability of various taxes
during the study period.
120
TABLE NO - 3.16
TAX STABILITY ANALYSIS
Tax Items Value of Standard
deviation Mean Value
Coefficient of
Variation
Personal Income tax 29377.4 26938.65 1.090
Corporate Income tax 54977 51546.50 1.066
Wealth tax 2563 3745.12 0.684
Excise Duties 29644 49142.71 0.603
Custom Duties 16934.5 41184.55 0.411
Service Taxes 52621 50943 1.032
Total Direct Taxes 83183 79389.50 0.104
Total Indirect Taxes 57705 101260.73 0.569
Total Tax Revenue 136639 178653.92 0.764
Source: Estimated by the Researcher
The table 3.16 presents the tax revenue stability analysis of various taxes
from 1990-91 to 2009-10. The revenue stability of individual tax items was
worked out from the value of coefficient of variation. The coefficient of
variation was calculated by dividing the value of standard deviation of an
121
individual tax item by its mean value. By having the values of coefficient of
variation of different taxes, it is easy to compare the revenue stability of different
taxes taken for this study.
From this analysis, it is inferred that the greater variation was found in
the revenues from the personal income tax (1.090) over the study period. This is
followed by the corporate income tax and service taxes. Their coefficients of
variation were calculated as 1.066 and 1.0329 respectively. The least coefficient
of variation was estimated for custom duties (0.411) and excise duties (0.0603).
The coefficient of variation for the wealth tax was calculated as 0.684. It is
concluded that revenue from the custom duties was more stable over a period of
study when compared to other tax items included in the present study. This is
followed by the excise duties and wealth tax. The revenue from the personal
income tax and the corporate income tax had a greater variability from 1990-91
to 2009-10.
As far as total direct and indirect taxes are concerned, the indirect tax
revenue had a greater variation (0.569) than the direct tax revenue (0.104).
Therefore it is disclosed that the tax stability is found to be more in direct taxes
than in the indirect taxes.
122
TAX BURDEN ANALYSIS
In the budgets of the Union Government of India, there had been massive
fiscal and budgetary difficulties due to the resource gap. The growing resource
gap is being compensated by taxation and mobilizing internal and external
borrowings. Revenue mobilization has a crucial role in the implementation of
fiscal policy. A major source of revenue mobilization is taxation. In taxation,
there are two types of taxes such as direct and indirect taxes. The easiest way of
finding tax burden analysis is to find out tax-GDP ratio. In this analysis, the ratio
of direct tax to GDP, the ratio of indirect tax to GDP and the ratio of total tax to
GDP were worked out. Tax burden is easily understood with the help of these
ratios.
123
TABLE NO - 3.17
TAX –GDP RATIO (TAX BURDEN ANALYSIS)
Source: Various Issues of Economic Survey, Government of India
Year Ratio of Direct
taxes to GDP
Ratio of Indirect
taxes to GDP
Ratio of Total
taxes to GDP
1990-91 1.21 6.33 7.54
1991-92 1.54 6.20 7.65
1992-93 1.60 5.58 7.18
1993-94 1.44 4.73 6.17
1994-95 1.81 4.83 6.64
1995-96 1.87 5.00 6.87
1996-97 1.84 4.94 6.79
1997-98 1.78 4.48 6.26
1998-99 1.83 4.14 5.98
1999-2000 2.12 4.45 6.57
2000-01 2.36 4.14 6.50
2001-02 2.09 3.76 5.86
2002-03 2.51 3.95 6.46
2003-04 2.78 4.00 6.79
2004-05 3.04 4.09 7.14
2005-06 3.36 4.17 7.53
2006-07 4.11 4.39 8.38
2007-08 4.90 4.44 8.55
2008-09 4.79 3.99 8.75
2009-10 4.65 3.41 8.14
124
The table 3.17 reveals the tax-GDP ratio from 1990-91 to 2009-10.The
tax – GDP ratio was analysed into three categories such as direct tax-GDP ratio,
indirect tax – GDP ratio and total tax-GDP ratio.
With regard to the ratio of direct tax to GDP, there had been constant
increasing trend from 1990-91 to 2009-10. It was 1.21 per cent in the year
1990-91 and it had increased to 1.87 per cent in 1995-96. It again rose to 2.36
per cent in 2000-2001 and it further went up to 3.36 per cent in 2005-06. At the
end of the study period, the direct tax – GDP ratio stood at 4.65 per cent. From
this analysis, it is understood that the direct tax –GDP ratio had been
continuously increasing without any fluctuations. It revealed that the tax burden
had been increasing over a period of study in the case of direct taxes. The
introduction of economic reforms in 90s and the subsequent revisions in Indian
income tax laws for rationalizing the tax administration had resulted in the
increase of tax collections from the individual assesses from Rs.1250 crores in
1990-91 to Rs.23766 crores in 2000 and it jumped to Rs.77249 crores in
2009-10. There had also been an increasing trend in the corporate income tax.
During the economic reforms, many foreign companies were allowed and
thereby they paid more taxes to the Government. The increased number of
multinational companies along with the increased number of domestic
companies led to increasing tendency in the corporate income tax. These were
the main reasons for the increasing trend of the ratio of direct tax to GDP. The
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faster growth of income tax and corporation tax as compared to other direct taxes
was due to trade liberalization and rationalization of taxes over the study period.
The ratio of indirect tax to GDP is different. There had been ups and
downs in this ratio. It was 6.33 per cent in 1990-91 and it declined sharply to 5
per cent in 1995-96. Again it went down to 3.76 per cent in 2001-02.Thereafter,
there had been an increasing trend till 2007-08 and it was 4.44 per cent in 2007-
08. But during the last two years of the study it started to decline. They were
3.99 per cent in 2008-09 and 3.41 per cent in 2009-10. Moderations in the
indirect tax rates and tax exemptions were the main reasons for these
fluctuations.
As far as the ratio of total tax revenue to GDP is concerned, there had also
been fluctuations during the study period. In the year 1990-91 this ratio was
calculated as 7.54 per cent and it stood at 5.86 per cent in 2001-02. Thereafter,
there had been continuous increasing trend in the ratio of total tax to GDP till the
end of the study period. At the end of the study period it was 8.14 per cent. The
tax – GDP ratio had been increasing during the last 10 years as a result of an
expansion of the tax base and improvement in the economic climate. The direct
tax collection had been growing at a much faster pace than the indirect tax
collections in the recent period. The gap between the direct taxes and indirect
taxes had narrowed down considerably. The reasons for increase in the tax
burden in India are due to the spectacular rise in expenditure on interest
payments, subsidies, defence and inability of public enterprises to generate the
required resources.
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TABLE NO - 3.18
RATIO ANALYSIS (Individual items to Total Revenue)
Source: Various Issues of Economic Survey, Government of India
Year
Revenue
Receipt
to Total
Receipt
Capital
Receipt to
Total
Receipt
Direct
taxes to
Total Tax
Revenue
Indirect
taxes to
Total Tax
Revenue
Tax
Revenue to
Revenue
Receipt
Non- Tax
Revenue to
Revenue
Receipt
1990-91 127.86 90.73 16.06 83.93 78.20 21.70
1991-92 131.87 76.94 20.17 79.82 75.82 24.17
1992-93 137.16 66.94 22.34 77.65 72.90 27.09
1993-94 141.16 103.70 23.42 76.57 70.83 29.16
1994-95 135.02 101.83 27.29 72.70 74.05 25.94
1995-96 134.40 71.19 27.19 72.80 74.40 25.59
1996-97 134.76 65.68 27.07 72.91 74.20 25.79
1997-98 139.94 103.55 28.40 71.59 71.43 28.84
1998-99 142.84 124.28 30.69 69.30 70.00 29.99
1999-2000 141.48 90.20 32.30 67.69 70.67 29.32
2000-01 140.93 98.18 36.33 63.66 70.95 29.04
2001-02 150.75 121.69 35.72 64.27 66.33 33.66
2002-03 145.59 113.86 38.86 61.13 68.68 31.39
2003-04 141.09 113.02 40.96 59.03 70.87 29.12
2004-05 136.12 89.14 42.66 57.39 73.46 26.53
2005-06 128.56 58.70 44.65 55.34 77.78 22.10
2006-07 122.36 45.75 49.06 52.44 81.73 19.65
2007-08 120.43 38.15 57.32 51.90 83.02 21.03
2008-09 120.65 72.70 54.70 45.68 82.88 17.11
2009-10 129.58 85.68 57.15 41.92 77.17 22.82
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From the table 3.18 it is very clear that the trend of ratio of revenue receipt
to total receipt of the Union Government had been fluctuating from 1990-91 to
2009-10. During 1990-91, it was calculated as 127.86 per cent and it had been
continuously increasing up to 2001-02. After that there had been decreasing
trend and it was 129.58 per cent at end of the study period with smaller
fluctuations. The first 10 years of the study witnessed the decreasing trend.
Revenue receipt consists of tax revenue and non-tax revenue and changes in the
tax laws, tax base and changes in the tax rates of both direct and indirect taxes
led to ups and downs in the revenue receipts. Besides, tax exemptions, tax
holidays were announced from time to time. A drastic change in the revenues of
public sector undertakings is another important reason for this changing trend.
The ratio of capital receipt to the total receipt had also been highly
fluctuating over the period of study. It was 90.73 per cent in 1990-91 and 103.55
per cent in 1997-98 after having a drastic fluctuation. It went down to 58.70 per
cent in 2005-06 and it rose to 85.68 per cent at the end of the study period. The
major cause for this fluctuating trend is due to fluctuations in recovery of loans
and advances. There had been increase and decrease in the collection of loans
and advances given by the Union Government over the study periods. Besides,
there were slight variations in the borrowings of the Union Government from
1990-91 to 2009-10.
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In case of the ratio of direct and indirect taxes to the total tax amount is
concerned, there had been sharp increasing trend in the ratio of direct taxes to
total tax revenue. It was 16.06 per cent in 1990-91which further rose to 32.30 per
cent in 1999-2000. It had further increased to 40.96 per cent in the year 2003-04.
At the end of the study period, the direct taxes to total tax ratio was calculated to
be 57.15 per cent. The higher share of direct tax revenue which increased from
16.06 in 1990-91 to 57.15 per cent in 2009-10 reflected a sharp improvement in
the equity of our tax system. Increasing tax base was due to the revised salary
award by the fifth and sixth pay commissions and it led to more collection of
personal income tax. Tax reforms such as eliminating distortions in the tax
structure, introducing moderate tax rates and expanding tax base had produced
impressive results in direct tax collection.
There had been decreasing trend in indirect tax to total tax ratio. It was
83.93 per cent in 1990-91 and it drastically declined to 63.66 per cent in 2000-
01.The ratio again fell down to 41.92 per cent in the year 2009-10.It did not
mean that the collection of indirect taxes had been decreasing year by year.
There had been an increasing amount of collection of both direct and indirect
taxes. But the collection of direct tax amount was more than the indirect tax
collection due to the expanding tax base. This is the main reason for record
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increasing share of direct taxes and decreasing share of indirect taxes in the total
tax revenue.
At the beginning of the economic reforms process in 1991-92, the ratio of
direct and indirect taxes in gross tax revenue was 20.17 per cent and 79.82 per
cent respectively. As a part of the larger economic reforms, reforms in the tax
structure effected through a gradual and sequential reduction in the rates of
custom and excise duties together with the increase in the levels of income
resulted in a gradual shift in the composition of taxes. As a result in 2004-05, the
year when the FRBM regime became operational, the ratios of direct and indirect
taxes were 57.15 per cent and 41.92 per cent of gross tax revenue in 2009-10.
Full exemption from custom duties presently available to specified raw
materials, imported by manufacturers and exporters of sports goods was
extended to more items. Similarly, full exemption from customs duties available
to specified raw materials and equipment imported by manufacturers-exporters
of leather goods, textile products and footwear industry was extended to some
additional items.
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