The dynamics of tax cuts and collections under Modi: A tale of prosperity

In the midst of a political maelstrom, where the Congress and its cohorts spun tales of fiscal folly, data and facts reveal the real, upbeat picture.

Contrary to their narratives set on various social and micro-blogging platforms that the Narendra Modi-led government at the Centre had pared corporate tax in a hot-haste manner which had no benefit for the Indian economy and that personal tax has overtaken corporate tax, the move was not just a flash in the pan; it was a clarion call to stoke the fires of investment in the manufacturing sector, a cornerstone of the Modi government’s ‘Make-in-India’ campaign.

Companies that come into existence after October 1, 2019, with eyes on manufacturing, were handed a golden ticket - a chance to pay income tax at a mere 15 per cent, provided they kept clear of exemptions and got their gears turning by March 31, 2023, a deadline with whispers of an extension to 2024.

The bulls on the stock market doffed their hats to this audacious move.

On the day of the announcement, the Sensex leapt by 5.3 per cent, its most significant single-day rally in a decade, and the ascent continued with a 3 per cent rise when the markets opened the following Monday.

In September 2019, the Modi government’s move to whittle down the base corporate tax from a hefty 30 per cent to a svelte 22 per cent, sidestepping the usual budgetary beats and setting the stage for a streamlined tax regime. This move was nothing short of slicing through the Gordian knot, unravelling the complex jumble of taxes that had businesses in tangles.

The Congress and INDI Alliance, perhaps blindsided by their own narratives, seemed oblivious to the fact that this pivot from the norm was designed to grease the wheels of commerce and that it was the corporate giants who had previously feasted on tax breaks under the United Progressive Alliance (UPA), while the common taxpayer now found favour under the Modi administration.

The move later came to its organic fruition; the corporate tax cut of 2019 unfurled a trifecta of benefits; Indian corporate tax rates now stood toe-to-toe with global contenders, and the leaner tax rate cut the fat from the required rates of return, enticing firms to invest more, and the trimmed tax rate plumped up firms’ cash reserves, sparking a spree of capital expenditures.

The tax cuts' immediate aftermath was veiled by the Covid pandemic’s global upheaval. Yet, hindsight reveals a clear picture as analysts agree that this fiscal sleight of hand has buffed the shine of the Indian economy. This is evidenced by the swell in Foreign Direct Investment (FDI) from $36 billion in 2013-14 and registered its highest-ever annual FDI inflow of $85 billion in the financial year 2021-22.

Since the Modi government moved to fiscal consolidation in 2019, the figures paint a rosy picture of the Indian economy.

Personal income tax collections, with the Securities Transaction Tax (STT) in tow, ballooned to Rs 12.01 lakh crore for the fiscal year 2023-24, marking a hearty 24.26 per cent increase. Net personal income tax collections, STT included, swelled by 25.23 per cent to Rs. 10.44 lakh crore.

Tax refunds, too, saw a generous uptick, swelling by 22.74 per cent to Rs. 3.79 lakh crore, a clear sign that the tax coffers were brimming. The tax collection figures were a testament to the Indian economy’s brisk pace. The interim budget revealed a robust 17.70 per cent year-on-year leap in net direct tax collections, climbing to Rs 19.58 lakh crore for the fiscal year 2023-24, up from the previous year’s Rs 16.64 lakh crore.

Before any refund adjustments, the fiscal year’s gross direct tax collections stood at a commendable Rs. 23.37 lakh crore, an 18.48 per cent growth over the previous year’s Rs. 19.72 lakh crore. Corporate tax collections also enjoyed a healthy boost, with gross revenues reaching Rs. 11.32 lakh crore, a 13.06 per cent increase from the previous year. The net corporate tax collections reflected a 10.26 per cent growth, standing at Rs. 9.11 lakh crore. The initial budgetary forecast for direct tax revenues was pegged at Rs. 18.23 lakh crore, later revised to Rs. 19.45 lakh crore.

The provisional tallies outpaced both the original and revised estimates by 7.40 per cent and 0.67 per cent, respectively.

The narrative of income tax collection in India is a tale of prosperity and compliance; the recent surge in collections is more than just numbers—it’s a reflection of an expanding tax base, burgeoning prosperity, and heightened compliance.

Dissecting this narrative through an economic lens, we find encouraging data. The exponential increase in income tax returns filed by individuals -- from 3.8 crore in 2014 to nearly 8.18 crore in 2024 -- paints a vivid picture of a burgeoning tax base underpinned by prosperity.

As prosperity blooms, more individuals climb the income ladder, entering the income tax bracket. The middle class, in particular, has seen a significant uplift, with the Modi government’s policy allowing zero tax liability for annual incomes up to Rs. 7.5 lakh, empowering them as key contributors to the nation’s fiscal health.

The Weighted Mean Income Trajectory, according to SBI Research, tells a compelling story. Over the past decade, the weighted mean income has nearly tripled -- from Rs. 3.1 lakh in FY 2014 to an impressive Rs. 11.60 lakh in FY 2021, highlighting India’s economic vibrancy and upward mobility.

Lastly, the Congress and its allies seem to have misjudged the corporate versus individual tax contributions.

Globally, the distribution of tax revenues between corporate and individual sectors varies significantly. In OECD countries, corporate taxes make up a modest 9.8 per cent of total tax revenue, while individual taxes contribute a substantial 23.9 per cent. In the US, corporate taxes account for a mere 5.1 per cent of tax revenue, whereas individual taxes form a significant 41.1 per cent. This pattern underscores the pivotal role played by personal taxes in funding public expenditures. In India, the trend aligns with global patterns.

Corporate tax revenues, while important, occupy a smaller share of government coffers compared to individual taxes. The irony of the political discourse surrounding tax cuts is palpable. Under the UPA regime, most tax breaks favoured corporations, perpetuating a skewed distribution. In contrast, the Modi government’s focus on individual incentives has borne fruit, with taxpayers -- individuals and middle-class households -- reaping greater benefits from targeted tax relief measures. India’s income tax landscape reflects not only fiscal dynamics but also societal progress. As the tax base expands and prosperity flourishes, the nation stands poised for continued economic growth, driven by the collective contributions of its citizens.