CHAPTER III ANALYSIS OF REVENUE RECEIPTS AND...

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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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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


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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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


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


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

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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


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


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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


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


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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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.

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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.

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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


The table 3.6 presents the buoyancy coefficients of various direct taxes of

the Union Government in India during the study period.

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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

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which was statistically significant both at 5 per cent and 1 per cent levels of

significance.


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.

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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.

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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


* 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


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


0.9552 Total Direct Tax

Revenue

0.5278


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.


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


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


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


* 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


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



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


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



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



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


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

125

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.

127

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

128

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.

129

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

130

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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