India Economy And Strategy - Anomalous IT Collection May Fade, Exposing The Underlying Fiscal Knot: Systematix

Systematix Research Report

In this note, we assess the latest data on income tax collections for FY24 with the view to ascertaining the income situation of the top end of the earning population.

The upshot is that the post-pandemic recovery in earnings of individuals has been muted, slowing to 4.5% in FY24 thereby averaging at 5.8% on a 5-year compound annual growth rate, barely enough to match the inflation.

In addition, the inequality among salary earners has risen to a decade high. The puzzling feature of compounding income tax collections is rooted in this rising inequality and rising compliance rather than income growth.

The anomalous buoyancy in income tax collection, oversized dividend payout by RBI and curtailment in spending, particular capital outlay are the major factors behind the 54% decline in Government of India’s fiscal deficit in year-to-date FY25 (April-July).

With both structural and one-off factors maxing out, ebbing of the initial buoyancy in direct taxes will likely intensify the fiscal knot, accentuating the trade-off between the revenue and capital spending.

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