The Role of Tax Buoyancy in Economic Resilience

What is Tax Buoyancy?

Tax buoyancy measures the responsiveness of tax revenue growth to changes in GDP. It indicates how well tax revenues increase in proportion to economic growth. A buoyancy value above 1 means tax revenue grows faster than GDP, demonstrating an effective tax system.

Key Facts on Tax Buoyancy in India

• FY2026 Union Budget Impact: A significant buoyancy in personal income tax revenue is expected to counteract tax relief measures, contributing to fiscal stability.
• Recent Trends:
  • FY2021-22: Tax buoyancy was recorded at 2.28, showcasing a strong recovery post-lockdown.
  • FY2022-23: Declined to 1.44, primarily due to the lingering effects of the pandemic.
  • FY2023-24: Buoyancy rose to 2.65, demonstrating a significant recovery and reflecting efficient tax collection mechanisms.
  • FY2025-26: Estimated at 1.57, signaling rate cuts and moderate growth in tax revenue relative to GDP.

What Does Tax Buoyancy Depend On?

Tax buoyancy is influenced by several critical factors:

• Economic Growth: Strong GDP growth directly impacts tax buoyancy as higher incomes, profits, and consumption lead to increased tax revenues.
• Tax Base Expansion: Bringing more individuals, businesses, and economic activities into the tax net ensures higher revenues. For instance, the government’s focus on formalizing the economy and promoting digital transactions has expanded the tax base in India.
• Effective Tax Policy and Administration: Reforms such as reducing corporate tax rates, simplifying tax procedures, and promoting compliance through technological advancements like the Goods and Services Tax (GST) portal enhance buoyancy.
• Compliance Levels: Measures like curbing tax evasion, providing incentives for timely filing, and streamlining tax audits improve adherence, boosting revenue collection.
• Sectoral Performance: Buoyancy depends on high-growth sectors like IT, manufacturing, and services, which contribute significantly to tax revenues.
• Global Economic Factors: Events like inflation, trade disruptions, or financial crises can impact buoyancy indirectly by affecting domestic economic performance.
• Cyclicality of the Economy: During economic booms, tax revenues increase significantly, reflecting high buoyancy, whereas during downturns, buoyancy tends to decline due to lower revenues from reduced economic activities.

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