Budget 2021: Tax buoyancy projected to be 1.2 in FY22

Central government's gross tax collection missed its FY21 target by almost 22 per cent at Rs 19 lakh crore. More so, it has pegged earnings of Rs 22.2 lakh crore in FY22, much lower compared to the budget estimates of FY20 and FY21 - Rs 24.6 lakh crore and Rs 24.2 lakh crore, respectively. On that account, the collections are expected to move up by 16.7 per cent in the next fiscal (against the revised estimates of FY21). Given the nominal GDP growth of 14.4 projected in the Union Budget of 2020-21, the tax buoyancy will probably stand at 1.3.

Tax buoyancy, which describes the sensitiveness of tax revenue growth to changes in nominal GDP, is expected to touch 1.2 in FY22, marginally lower than 1.3 in FY21 (both tax revenues and GDP are projected to decline). This is notably higher than buoyancy in FY19 and FY20. A ratio greater than one indicates revenue earnings are moving faster than the country's output.

According to Sushant Hede, Associate Economist at CARE Ratings, "The improvement in tax buoyancy has been on account of higher tax collections budgeted by the government, almost double digits growth expected in key tax revenues like corporate tax, income tax, GST, among others. As economic activities normalises and government does not announce any changes in direct tax rates, tax collections are likely to improve in FY22 and reflect positive for the economy and government finances."

Besides, the net tax revenue is budgeted to be Rs 15.4 lakh crore in FY22. Its share in GDP is expected to remain uniform at 6.9 per cent in both FY21 (revised estimates) and FY22, a marginal improvement from 6.7 per cent in FY20. "Net tax to GDP ratio at 6.9 remains stable in both FY21(RE) and FY22(BE) and this ratio has remained around 7 since FY14 onwards," says Hede.

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