What do you mean by tax buoyancy? Why is it significant for Government Budgeting?.
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.
Impact of tax buoyancy on Government Budget:
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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.
In the recent Union government budget of 2022-23, it was mentioned that according to the 2021-22 revised estimates (RE), the Centre’s gross and net tax revenues are estimated to grow at 24.1% and 23.8%, respectively. This is remarkable given that the GDP growth has remained muted with 9% expected growth which is followed by a 7% contraction a year before.
Given the greater fiscal space on the back of high tax buoyancy, the government must decrease the indirect taxes on fuel and other consumption items which might boost private consumption which has not recovered fully after the first lockdown according to the Economic survey.
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