There is a significant relationship between the government’s excise revenue and economic growth. The basic reality is that if the economy grows quicker, so does the government’s tax income.
The link between changes in the government’s excise revenue growth and changes in GDP is explained by tax buoyancy. It relates to how sensitive tax revenue growth is to changes in GDP. When taxation is buoyant, its revenue rises without the taxation rate rising.
UPSC GS 3 is one of the UPSC Mains’ nine subjective papers. Economic Development, Technology, Biodiversity, Environment, Security, and Disaster Management are the topics covered in GS Paper 3. This page will offer you extensive information regarding UPSC GS Paper 3 topic tax buoyancy.
Tax Buoyancy Depends on?
Now that we have explained about tax buoyancy, let us understand the deciding factors of the same:
#Scope of the taxation base
#Regime of excise administration
#The taxation rates are reasonable and straightforward.
#Creating Wealth
Tax Buoyancy Formula
Tax buoyancy is a topic that has relevance in UPSC GS paper 3. Recently, this has been in the news since the finance secretary stated that the revised revenue and spending forecasts for the current fiscal year are reasonable, as excise changeability predictions.
To calculate tax buoyancy, the formula that is used is ey. x = Yt – Yt-1/Yt-1/Xt – Xt-1/Xt-1. Here,
Yt = Gross levy revenue in ‘t’ year [current year]
Yt-1 = Gross levy revenue in t-1 year [previous year]
Xt = National Income in ‘t’ year [current year]
Xt-1 = National Income in t-1 year [previous year]
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What is Tax Buoyancy?
What is tax buoyancy? Let’s find out.
#Excise changeability is one of the most important measures of a government’s levy system’s effectiveness.
#In general, as the economy grows quicker, so does the government’s excise income.
#The link between changes in the government’s levy revenue growth and changes in GDP is explained by excise changeability.
#In other words, it assesses how responsive taxation is to economic development.
How does Tax Buoyancy Work?
This can be explained as,
#A simple example from our economy demonstrates the power of this principle. Everything was good for the economy in 2007-08. The GDP growth rate was approximately 9%.
#In 2007-08, the government’s taxation revenue, particularly direct taxes, increased by 45 per cent. We may claim that the tax buoyancy was five out of nine (45/9).
#Following the effect of the global financial crisis, GDP growth slowed to 6% the following year. The excise revenue growth has also slowed dramatically, falling to 18%. This indicates that excise changeability was 3 for the year. We might assume that if GDP growth had slowed more in the next year, say to 4%, excise revenue growth would have slowed to 8%, showing a tax buoyancy of 2.
#As a result, excise changeability demonstrates the relationship between economic performance and the government’s “pleasure” (financial charge). It demonstrates how taxation revenue realisation is very sensitive to GDP growth.
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What has the General Trend been in India?
#The Union administration obtained the greatest tax buoyancy rate in the past 28 years following economic changes in 2002-03.
#At the time, tax changeability had climbed to 2.
#This meant that the Centre’s total taxation collections grew at double the rate of the Indian economy in nominal terms.
#However, only a year before this reached a record high of 2, total taxation revenues fell in 2001-02.
#This was despite the fact that the economy had grown at a nominal pace of little more than 8%.
#So, from 1999-2000 to 2003-04, there was low tax buoyancy in two years and good tax buoyancy in the other three
#As a result, the era retains the record for both the greatest and lowest tax buoyancy rates in post-reform India.
What has the General Trend been after 2004-05?
# Buoyancy ranged between 1.3 and 1.7 between 2004-05 and 2008-09, indicating a commendable performance.
# The collections fell sharply to around 0.2 in the fifth year (2008-09).
# This was owing to the global financial collapse and the taxation measures implemented to mitigate its impact on the economy
# The taxation changes implemented during this period did contribute to an increase in the changeability rate in the next decade.
# This was extremely inconsistent throughout the four years between 2009-10 and 2011-12.
# In terms of exercise changeability, the 2014-19 period witnessed consistent performance.
# The Centre’s gross excise income increased by only 1.5 per cent in the first half of 2019-20 compared to the same time in 2018-19.
What is Tax Elasticity?
This is a similar-looking concept. It refers to fluctuations in taxation revenue as a result of the rate adjustments. The elasticity is demonstrated, for example, by how revenue varies when the government cuts corporate income tax from 30% to 25%.
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What does the Slowdown Indicate?
Excise changeability can be explained as one of the key indicators of the efficiency of the government’s taxation system. Usually, when the economy achieves acceleration, this leads to an increase in taxation revenue. Therefore, poor responsiveness of levy collection could pose new challenges for sharing taxes with the states. In this regard, we have explained the impact of the tax slowdown.
#The recent deterioration in tax buoyancy is a source of concern for the government exchequer.
#It has the potential to derail the government’s budget reduction efforts.
#It may also serve as a deceptive foundation for the 15th Finance Commission’s estimates on how to share the Centre’s tax income with the states.
#If the present low excise changeability is used to forecast revenue growth for the coming five years, revenue issues for both the Centre and the states would become much more complex.
What is the Way Forward?
#The 15th Finance Commission must figure out how to provide a more solid basis for estimating tax buoyancy in the coming years.
#If it makes the erroneous judgement now, the excise collecting assumptions may become faulty, which would hurt the new excise devolution method.
#As a result, determining the long-term and sustainable trend of tax buoyancy will be critical for the tax sharing recommendations.
8.7 % Projected Growth Rate: Moody
#Moody’s recently forecasted 9.3 per cent GDP growth in India in 2021-22.
#Benchmark growth rate: 9.3 per cent, which is close to the 8.7 per cent benchmark growth rate that would keep India’s GDP at 2011-12 prices at the same level as in 2019-20.
#This is less than the nominal growth rate of 14.4 per cent projected in the Union Budget.
#This will result in decreased levy and non-excise revenues, as well as a rise in the budget deficit.
#The Centre’s gross tax receipts (GTR) were expected to be buoyant at 1.2.
#However, if the levy changeability of 1.2 is deemed too optimistic and buoyancy of 0.9, the average buoyancy of the five years preceding the COVID-19 year, is used, the nominal increase of GTR is 12.2 percent.
#This will result in the Centre’s GTR being around 21.3 lakh crore.
# The resulting gap in net excise collections for the Centre is expected to be about 0.6 lakh crore.
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Conclusion
In this article, we have explained what Tax buoyancy is. This topic comes under UPSC GS Paper 3. To prepare well for this paper, prepare handmade notes of topics mentioned in the syllabus. If you are new to economics, start your preparation by reading some basic class 12th NCERT books. Once you have understood what the syllabus is, you can start the next step towards your civil service preparation by going through the previous year questions. This will give you an overall view of what is expected in the examination.
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