What Is Tax Buoyancy?

Tax buoyancy is the relationship among variations in the government’s tax income change and the potential in GDP. It has to do with the sensitivity of tax revenue growth to changes in GDP.

When a tax collects greater revenue without changing the rate of taxing, it is said to be buoyant. Tax buoyancy is influenced by several factors, including the volume of the tax base, the attractiveness of the tax authorities, and the rationale and transparency of the tax rates.

For a better understanding of the Taxation System in India, candidates can visit the linked article.

Why Is It Important?

The growth in tax receipts from Goods and Services Tax (GST) has recently been noted as a cause for concern. The primary indirect tax slabs are expected to be reviewed by the council of ministers panel constituted under the GST Council. The inability of tax collection to respond to economic development offers significant issues for revenue-sharing conventions with governments.

This will be in combination to rate rationalization, the rectification of the inverted duty structure, re-examination of exclusions, e-way bill platforms, e-invoices, FASTag data, and other technical efforts that the ministerial committees will explore as part of their broader revenue augmentation objective.

What Factors Go Towards Determining It?

Apart from the tax base’s size, the tax administration’s friendliness, and the simplicity of tax rates, numerous more factors influence tax buoyancy. Furthermore, taxes measures have a delayed impact. This can be determined only by looking at the pattern over a prolonged period.

As a result, tax buoyancy inside a given year may show the effects of a series of negative events that occurred during that year. However, policy adjustments initiated a few years ago usually result in a lengthier tendency of tax buoyancy over roughly five years. As a result, the delayed impact of changes in policy on tax buoyancy is difficult to overlook.

Also, refer to the following links for exam preparation:

How to Calculate Tax Buoyancy?

The Tax Buoyancy Formula is measured as the proportion of tax revenue growth to nominal GDP growth for a particular year. If gross tax receipts improve more than proportionally in response to an increase in GDP estimates, the tax system is buoyant.

What Has Been the Trend for the Past Few Years?

1. After economic changes, the Union government earned the greatest tax buoyancy rate in the last 28 years in 2002-03.
2. The year before, tax buoyancy had grown to 2. This means that the Centre’s gross tax receipts increased at twice the Indian economy’s nominal growth rate.
3. However, in 2001-02, a year before the tax buoyancy reached a new high of 2, gross tax receipts fell.
4. Even though the economy had grown at a nominal pace of slightly over 8%, this was the case. So, from 1999-2000 to 2003-04, there were two years with weak tax buoyancy and three years with good tax buoyancy. As a result, the era holds the record.
5. From 2004-05 to 2008-09, the first four years of tax buoyancy were 1.3 and 1.7, which is a respectable performance. Tax buoyancy dropped sharply to roughly 0.2 in the sixth year (2008-09).
6. This was due to the impact of the global financial meltdown and the tax measures enacted to mitigate its effects on the economy.
7. Therefore, tax buoyancy was moderate in four of the seven years between 1991 and 1997, ranging from 1 to 1.3, and bad in the remaining three.
8. However, tax reforms implemented during this period contributed to a rise in the tax buoyancy percentage in the next decade.
9. Similarly, tax reforms implemented between 1999 and 2004, especially within indirect tax structure, aided buoyancy of tax from 2004 to 2009.
10. Between 2009-10 and 2011-12, a four-year period of tax buoyancy was extremely erratic.
11. Tax buoyancy remained consistent from 2014 to 2019. The Centre’s gross tax collection increased by only 1.5 percent in the first quarter of 2019-20 compared to the same time in 2018-19.
12. On the other hand, the buoyancy of tax has dropped to around 0.15. This is based on a nominal economic growth rate of 10% in the first half of the year.

Other Related Links:

How Has Tax Buoyancy Been Lagging?

The central exchequer is concerned about the decline in the buoyancy of tax in recent years.

It has the potential to derail the government’s budget restructuring goals. It could also give a skewed foundation for the 15th Finance Commission’s calculations on splitting the federal government’s tax income with the states.

As a result, determining the lengthy and sustained pattern of tax buoyancy will be critical for the 15th Finance Commission’s revenue-sharing recommendations. Studying this topic of Tax buoyancy is important for UPSC.

Aspirants can visit the linked article and get details about the upcoming government exams that comprise current affairs and general awareness as an important topic in the syllabus.

Furthermore, visit BYJU’S for the latest competitive exam updates, study material and preparation tips.