What does the Apr-Dec tax data tell us about the state of the economy?

 

LATEST NEWS – One of the most interesting questions in Indian macroeconomics today is: how are we faring since late 2016? In this article, I seek to analyse data on tax revenues and obtain some clues about the performance of the economy.

In a press release published on January 9, the central government reported the following increases in tax collections during April-December 2016, compared to the corresponding period of previous year:

1. Central excise duty: 43 per cent.
2. Service tax: 23.9 per cent.
3. Customs duty: 4.1 per cent.
4. Corporation tax: 4.4 per cent.
5. Income tax: 24.6 per cent.

These are large values. Holding other things constant, they suggest buoyant economic activity. However, when looking at tax data, we have to look at the extent to which other things are indeed constant. When analysing tax data, in order to read the state of the macroeconomy, we need to adjust for the part of the tax revenues which are on account of ‘Additional Revenue Mobilisation’ (ARM). Two kinds of ARM are:

1. An increase in tax rate: additional revenues due to higher rate do not indicate robustness of the underlying activity.
2. An administrative measure: additional revenues from one-time administrative measures (eg. a tax amnesty scheme) may not reflect the underlying economic activity.

Let us walk through the major taxes, and see what we can tell, and what we do not know. READ MORE

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