Tax buoyancy refers to the proportionately higher rise in the tax revenues in response to rise Gross domestic product(GDP) of a country. In other words, tax is said to be buoyant if the tax revenues increase more than proportionately in response to a rise in national income or output.
Importance of tax buoyancy as an indicator:
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- It is an indicator to measure efficiency and responsiveness of revenue mobilization in response to growth in the Gross domestic product or National income.
- It is an indicator of development - as the economy develops more people come under the tax net and therefore tax collection increases more in the proportion of GDP growth.
- It is an indicator of less black money/ tax evasion - The as more and more citizens avoid being dishonest and file their tax returns, the tax collection increases.
- It is an indicator of formalization of the economy - as more and more transactions are recorded formally due to formalization tax collection increases.
- Most importantly, it is an indicator of growth.
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- Positive impact:
- Increases revenues
- Reduces fiscal deficit
- Higher than expected tax buoyancy is critical in extinguishing existing government liabilities(debt)
- Allows greater Capital expenditure by the government.
- It provides an opportunity to circulate the money more.
- It allows the Union government to make greater devolution of funds to states.
- Negative impact:
- Reduces private consumption & Investments: It sucks out money from the pockets of the citizens.
- In a situation of recession, Government generally wants the citizens to spend more to start the consumption cycle. Higher tax collection can be counter productive.
- Positive impact: