Changing Dynamics of India’s tax collection sources

The Progressive Pivot in Indian Taxation

India’s tax revenue trajectory has seen a dramatic transformation, climbing from ₹12.45 lakh crore in FY15 to an estimated ₹44 lakh crore by FY25. A notable structural shift has occurred, with direct taxes now accounting for approximately 58.5% of total collections, a significant increase from earlier periods. This evolution is crucial as direct taxes, levied on income and profits, are inherently progressive, contrasting with indirect taxes that can disproportionately burden lower-income groups. The growing dominance of direct taxes suggests an enhancement in the fairness and equity of the nation’s tax structure.

Shifting Dynamics within Direct Taxes

Within the direct tax domain, the contribution from corporate profits has seen a decline, falling from 61.75% in FY15 to an estimated 44.41% by FY25. Consequently, non-corporate taxes, largely fueled by individual income tax filers, have emerged as the principal source of direct revenue since FY21. This reallocation is significantly linked to a substantial expansion in the number of income tax return filers, which surged from approximately 35 million in FY15 to over 85 million by FY25. Facilitating this growth are measures such as faceless assessments, pre-filled returns, and the comprehensive reporting of financial transactions through the Annual Information Statement (AIS) and Taxpayer Information Summary (TIS). Policy adjustments, including the reinstatement of Long-Term Capital Gains (LTCG) tax on listed equities and the relocation of dividend taxation burden to shareholders, have also influenced this composition.

GST: The Engine of Indirect Revenue

In less than a decade, the Goods and Services Tax (GST) has established itself as a highly productive and resilient revenue stream, with collections reaching approximately ₹22.08 lakh crore in FY25. This performance is driven by a confluence of economic expansion and advanced technology-driven compliance mechanisms, including e-invoicing, e-way bills, and sophisticated analytics for enforcement, which have demonstrably reduced revenue leakages. The implementation of a unified tax framework, where both central and state governments levy taxes on the same transaction, has further solidified revenue capture across the value chain. International comparisons show that many countries are adopting similar digital compliance measures to boost indirect tax efficiency.

Customs Moderation Reflects Domestic Focus

Customs duty currently represents 6.1% of the central government’s gross tax revenue. Its growth has been more subdued compared to GST, reflecting a deliberate strategic shift towards domestic consumption-based taxation. According to economic survey data, customs collections experienced a year-on-year decline of 7.3%, highlighting their sensitivity to import volumes and global economic conditions. Initiatives like ‘Make in India’ and Production Linked Incentives (PLI) are aimed at bolstering domestic value addition and reducing reliance on imports. As domestic manufacturing capacity strengthens, a moderation in customs revenue growth is anticipated, signaling a long-term commitment to building economic resilience through self-sufficiency. This approach contrasts with some developing economies that continue to rely heavily on import duties for fiscal revenue.

The Analytical Deep Dive

The increasing share of direct taxes signifies a move towards a more equitable tax system, a trend that global financial institutions like the IMF view favorably, provided it is accompanied by sustainable economic growth. However, the declining proportion of corporate tax revenue within direct taxes warrants attention. While policy changes like corporate tax rate reductions were intended to stimulate investment, the shift in composition suggests that growth in non-corporate income, particularly from individuals, is now the primary driver of direct tax expansion. This divergence could indicate a need for continued efforts to foster corporate profitability and investment incentives to ensure broad-based economic expansion. The robust performance of GST, driven by digitalization, mirrors global best practices and has significantly strengthened India’s indirect tax base, making it more stable and less susceptible to external trade shocks than customs duties. The fiscal health of India, as assessed by rating agencies, remains contingent on managing the fiscal deficit, with tax revenue growth being a critical component.

The Forensic Bear Case

While the shift towards direct taxes is lauded for its progressivity, a potential downside is the increasing reliance on individual taxpayers and the consequent pressure on household finances if not managed carefully. The softening growth in non-corporate tax collections, observed after recent slab rate changes for individuals, highlights this sensitivity. Furthermore, a declining corporate tax share, even with rate reductions, could signal underlying issues in corporate sector profitability or a reduced incentive for businesses to reinvest earnings domestically. Global economic uncertainties and potential trade policy shifts can significantly impact customs revenue, creating volatility that the domestic consumption-focused GST aims to mitigate, but does not entirely eliminate. The effectiveness of technology-driven compliance for GST is paramount; any lapse in these systems could lead to significant revenue erosion. The overall reliance on tax collections, which reached nearly 11.6% of GDP in FY24, needs to sustain its momentum to meet fiscal targets, a task that becomes more challenging amid global economic headwinds.

Future Outlook and Fiscal Projections

Looking ahead, the Indian tax system is poised to continue its evolution, with a focus on further enhancing compliance and broadening the tax base. The government’s strategy to boost domestic manufacturing and consumption is expected to underpin GST collections, while customs duties will likely play a more targeted role in supporting industrial policy. Analysts project continued growth in overall tax revenue, driven by sustained economic activity and effective tax administration. However, managing the fiscal deficit remains a key priority, necessitating a balanced approach to revenue generation and expenditure management. The trend of increasing direct tax collections, supported by a growing number of filers, is expected to persist, contributing to a more progressive and stable revenue profile for the nation.

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