Where does the government get its money from?
Today we discuss about the Fiscal Policy. The policy that deals with government expenditure and receipts.
Let’s look at receipts. The government receipts can be divided into 2
– Revenue Receipts: These are recurring receipts – either through Tax or Non-Tax.
– Capital Receipts: These are usually one-time receipts, mainly comprising of Disinvestment proceeds and Borrowings.
Tax Revenues: What do improving tax collections mean?
The overall gross tax revenue is comprised of
– Direct Taxes: Taxes on income – that we pay directly. Income tax and Corporate tax are predominant parts here.
– Indirect Taxes: Taxes on transactions – that we pay to an intermediary, who deposits on our behalf. Example GST.
Non-Tax revenues comprise of Dividends by various government and PSU entities.
What do FY22 numbers show us?
Out of the gross tax revenue of INR 27 lakh crore, nearly INR 14 lakh crore was from direct taxes. Roughly half each was corporate and income tax. Income tax has grown at a CAGR of 14% from 2014 to 2022, while Corporate Tax, despite the Rate cut in 2019, has been able to show a CAGR of nearly 8% over the past 8 years.
Infact, the provisional collection for last year Income tax is almost equal to the Budgeted target for FY23. Even without any growth, we should achieve next year’s tax collection targets.
Buoyancy in tax collections has helped the government manage an expansionary fiscal policy (higher expenditure). This allows the government to channelize higher expenditure towards capital expenditure, which has nearly doubled over the past 4 years.
If tax compliance improves further, and the economic growth continues, the next decade could see a strong improvement in the government budgets and finances.
What are the avenues you think the government can channelize this higher revenue in?
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