Is India’s falling tax growth a warning signal?

The Controller General of Accounts (CGA) regularly compiles government revenues, expenditures and deficits data and releases it every month. The September fiscal data were released on October 30.

The Government of India budgeted gross tax revenue (GTR) — an aggregate of all tax receipts — at Rs 38.40 trillion for 2024-2025, estimating a growth of Rs 4.79 trillion (14.26 per cent) over 2023-2024 Budget estimates of Rs 33.61 trillion (11.72 per cent with respect to 2023-2024 revised estimates of Rs 34.72 trillion).

The CGA data for first six months indicates that the GTR grew by 12.02 per cent (Rs 18.14 trillion against Rs 16.19 trillion in 2023-2024), which is lower than the growth projected with reference to the 2023-2024 Budget estimates but slightly higher with reference to the revised estimates.

The six-month overall GTR performance, however, hid big difference in the performance of the first and second quarters of 2024-2025. While the GTR growth was as high as 23.65 per cent in the first quarter (Rs 8.31 trillion against Rs 6.72 trillion in the first quarter (Q1) of 2023-2024), growth tanked to 3.76 per cent in the second quarter (Rs 9.83 trillion against Rs 9.47 trillion in Q2 2023-2024). This is alarming!

How is the granular tax performance? What does it signal for the rest of the year?

Disaster in direct taxes

Direct taxes, personal income taxes (PIT) particularly, have been holding the high tax growth flag for quite some time. After an eye-popping growth of nearly 50 per cent in 2021-2022, direct taxes (corporation taxes and PIT together) recorded high growth of 17.9 per cent and 17.6 per cent in 2022-2023 and 2023-2024 respectively.

In Q1 2024-2025 also, direct taxes recorded an extraordinary growth of 40 per cent (Rs 4.62 trillion against Rs 3.30 trillion in Q1 2023-2024). In Q2, however, the fortunes reversed. Direct tax receipts in Q2 2024-2025 at Rs 5.64 trillion have witnessed an unbelievable growth of (-)1.53 per e (Q2 2023-2024 receipts Rs 5.73 trillion). This is nothing short of a disaster.

Both corporation tax and PIT performed badly in Q2.

Corporation taxes grew by 26.19 per cent in Q1 2024-2025 (Rs 1.75 trillion against Rs 1.39 trillion in Q1 2023-2024). In Q2, despite stable performance in September, corporation tax receipts were only Rs 2.87 trillion (against Rs 3.13 trillion in Q2 2023-2024) recording a growth of (-)8.33 per cent — thereby bringing the performance during the first half (H1) 2024-2025 down to a tepid 2.27 per cent.

In Q1, the PIT recorded a hefty growth of 50 per cent (Rs 2.87 trillion against Rs 1.92 trillion in Q1 2023-2024). In Q2, the PIT growth slumped to 6.65 per cent (Rs 2.77 trillion against Rs 2.60 trillion in Q2 2023-2024).

While the half year 2024-2025 PIT growth is still healthy at 25 per cent, the big decline in Q2 is quite ominous.

Indirect taxes remain in a low growth groove

Indirect tax receipts, budgeted at Rs 16.33 trillion for 2024-2025, were projected to grow at 9.45 per cent over the revised estimates for 2023-2024 (Rs 14.92 trillion).

The receipts from three major indirect taxes (central GST, customs, and excise duty) recorded growth of 8.53 per cent in the first half (Rs 6.83 trillion against Rs 6.29 trillion in H1 2023-2024), about 1 per cent lower than the projected growth.

In Q1 2024-2025, major indirect taxes grew by only 6.3 per cent (Rs 3.27 trillion against Rs 3.07 trillion in Q1 2023-2024). Their performance was better in Q2 at 10.66 per cent (Rs 3.56 trillion against Rs 3.22 trillion in Q2 2023-2024).

In terms of individual taxes, in H1 2024-2025, CGST growth was the highest at 10.84 per cent per cent(Rs 4.41 trillion against Rs 3.98 trillion in 2023-2024). Customs duties registered a lower growth of 6.38 per cent while excise duties were at the lowest growth of 2.97 per cent.

In all, all major indirect taxes performed averagely.

Lower expenditures kept fiscal deficit in check

By end of the first half, the government incurred total expenditures of Rs 21.11 trillion, (-)0.36 per cent lower than total expenditure of Rs 21.19 trillion in H1 2023-2024.

Capital expenditures witnessed a sharp deceleration at 15.42 per cent in H1 2024-2025 (Rs 4.15 trillion against Rs 4.19 trillion in 2023-2024). Capital expenditures were lower than the last year Q1 as well as in August and September 2024.

Under-performance in expenditure resulted in a benign fiscal deficit, about one-third less than in the first half of 2023-2024 (Rs 4.75 trillion against Rs 7.02 trillion) despite weaker growth of tax revenues.

Difficult times ahead?

Corporate earnings for Q2 2024-2025 announced in October indicated lower growth in net profits (in low single digits), which explains lower corporation tax growth in H1. There are indicators to suggest that there may not be any turn-around anytime soon.

The PITs witnessed superlative growth partly on account of spectacular capital gains made on stock exchanges. October brought most serious reversal in run-away stock prices not witnessed since Covid-19 impacted sale-off in March 2020. The downward trend seems more likely to linger on, resulting in the PIT not delivering an outstanding performance this year.

The GST data, including for October released on November 1, suggest that GST growth is likely to remain in single digits (even when nominal GDP growth exceeds 10 per cent).

Overall, it is increasingly apparent that FY 2024-2025 is likely to turnout a humbling tax growth performance, which will obviously have serious implications for capital expenditure and the overall Budget for 2025-2026 as well.

(Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream’ and ‘We Also Make Policy’.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.