Personal Income Tax Becomes India's Largest Revenue Source: Report

The Anand Rathi report reveals personal income tax has overtaken corporate tax and GST as India's largest revenue source. Despite varied trajectories since FY19, a robust compliance environment and effective tax administration have driven growth in collections, with an optimistic outlook for continued revenue increases.

According to an Anand Rathi report, personal income tax has emerged as the largest revenue contributor for the Indian government, surpassing both corporate tax and GST. Each of these tax categories now represents nearly 30 per cent of the gross tax collection, although their growth paths have diverged significantly since FY19.

Corporate tax growth has been notably slow and volatile, largely due to a sharp rate reduction. In contrast, personal income tax has surged to become the primary revenue source for the government. GST has shown consistent growth, overtaking corporate tax collections since FY23. Among major taxes, customs duty remains the lowest revenue earner.

Despite a substantial increase in corporate earnings in FY24, corporate tax growth was modest, unlike the robust increases in income tax and GST collections. This disparity points to a complex relationship between corporate profits and tax revenues, warranting further scrutiny.

Personal income tax has seen the fastest growth among the major tax categories. Both income tax and GST collections posted significant gains in FY24, even amid low private consumption growth and declining inflation rates. These trends indicate strong compliance and effective tax administration driving higher revenues.

The report projects a rise in tax buoyancy, which has averaged nearly one over the past five years, driven by India's robust GDP growth, estimated at a nominal 11-12 per cent. It forecasts a 13-15 per cent compound annual growth rate (CAGR) in overall gross tax collections, with an 11 per cent increase expected in FY25.

Non-tax revenues have also surged, mainly due to enhanced profit transfers from the Reserve Bank of India (RBI). With $650 billion in forex reserves and high US yields, this trend is likely to persist. The ratio of transfers to states to gross tax revenue is expected to stay around 32 per cent, maintaining fiscal balance.

The report notes a significant rise in capital spending, with the revenue-to-capital expenditure ratio improving from an average of 87 per cent:13 per cent during FY14-FY21 to 79 per cent:21 per cent in FY24. This ratio is projected to further improve to 77 per cent:23 per cent in FY25, reflecting a doubling of the CAGR in capital spending compared to a 12 per cent growth in revenue spending since FY19.

This shift underscores a strategic focus on long-term investments and infrastructure development. Revenue spending is expected to grow by 6 per cent in FY25, while capital spending is projected to rise by 17 per cent, signifying an accelerated pace compared to FY24.

The balanced approach aims to sustain economic momentum while ensuring fiscal prudence. Additionally, welfare spending on food subsidies and rural development is anticipated to increase, supporting rural India and stimulating consumption.

Debt servicing costs are also expected to rise significantly, reflecting the government's commitment to managing fiscal responsibilities while addressing social welfare needs.

(With inputs from agencies.)