The Indian government's budget for FY25 sets ambitious yet realistic targets for tax collections, aiming to reach INR 38.4 lakh crore, which is 10.8% higher than the previous fiscal year's provisional actuals. This target is driven by robust growth in direct tax collections, projected to rise by 12.3%, and sustained growth in GST collections, anticipated to increase by 11%.
Over the past three years, the government has consistently demonstrated conservatism in its tax revenue estimates, often surpassing budgeted figures. The FY25 budget follows this trend, aligning tax growth with the nominal GDP growth rate of 10.5%, maintaining a tax buoyancy ratio of 1.
Key Highlights:
1. Tax to GDP Ratio: The tax to GDP ratio for FY25 is projected at 11.8%, the highest since FY08. Notably, the direct tax to GDP ratio is expected to reach 6.8%, the highest since the 1980s, supported by a direct tax buoyancy of 1.2. In contrast, the indirect tax to GDP ratio is pegged at around 5%, with a buoyancy of 0.8.
2. Direct Tax Collections: The significant improvement in direct tax collections can be attributed to simplified tax filing procedures, enhanced monitoring and compliance, increased formalization of the economy, robust corporate profitability, and higher personal income levels. Personal income tax collections have surged, with a compound annual growth rate (CAGR) of 17.1% since pre-pandemic levels, outpacing corporate tax collections, which have a CAGR of 7.4%.
3. Indirect Tax Collections: Indirect tax collections are projected to grow by 8.8%, driven mainly by GST collections. The potential rise in overall consumption, buoyed by a resilient economy and higher compliance, is expected to support GST growth. However, this is partly offset by muted growth in customs and excise duties, which are projected to grow at 2% and 4.5%, respectively, the slowest since the COVID-19 pandemic, partly due to recent customs duty cuts.
4. Tax Devolution: Net tax collections are budgeted to grow by 11%, consistent with the previous year, thanks to improved gross tax collections and a decline in the growth of tax devolution to states. The share of tax devolution to states is pegged at 32.5%, higher than a decade ago but lower than the pre-pandemic level.
Non-tax revenues for FY25 are projected to grow by 35.8%, primarily due to a higher surplus transfer from the Reserve Bank of India (RBI), amounting to INR 2.1 lakh crore. Dividends and profits from the RBI and public sector enterprises are expected to grow by 69.6%, supported by the robust performance of public sector banks.
The share of non-tax revenues in total revenue receipts is set to reach 17.4%, the highest in the last five years. Telecom receipts are also budgeted to grow by 28.6%, driven by higher license fees despite a lukewarm response to the recent 5G spectrum sale.
The FY25 budget reflects a balanced and realistic approach to tax collection targets, emphasizing the importance of sustainable growth and fiscal prudence. With strategic measures to enhance direct and indirect tax collections and a focus on non-tax revenues, the government aims to strengthen its fiscal position while fostering economic growth and stability.
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