Tax Treat
Formalisation of the economy, lower corporate tax rates and digital tracking are beginning to pay off
After taking a hit during Covid, India’s direct tax collections have been displaying unusual buoyancy lately. In FY22, gross direct tax collections soared 49 per cent to ₹14.1 lakh crore, exceeding not just Budget estimates (₹11.08 lakh crore) but also the revised estimates (₹12.5 lakh crore). The growth last year however, could be explained by the low base effect. India’s GDP after contracting in FY21 due to Covid related disruptions, rebounded in FY22 with corporate profits following suit. But recent data from the Controller General of Accounts show that direct tax mop-ups have continued their strong growth into this fiscal as well. Net corporate tax collections for April-July 2022 at ₹1.96 lakh crore were 35 per cent higher than the same period last year, while net personal income tax mop-ups were a good 50 per cent more. With over a third of the direct tax collections budgeted for the year already in the kitty, the CBDT Chairman’s hope that actual mop-up will again exceed Budget estimates may not be misplaced. But this will hinge on the buoyancy sustaining through the year.
One factor behind the buoyancy in direct tax collections appears to be inflation. As they are levied on incomes, direct tax collections carry a greater correlation to nominal GDP growth than real GDP growth. India’s real GDP in Q1 FY23 coming at 13.5 per cent was somewhat disappointing, but thanks to high inflation, nominal GDP growth was at a robust 26.7 per cent. But both corporate and personal income tax receipts in the April-July period have surged much faster than the nominal GDP. With respect to corporate taxes, this could be explained by two factors — increasing formalisation of the economy and improving compliance. While input cost pressures have moderated profit growth at India Inc this year, the process of formalisation of the economy, with a shift in profits from the unorganised to organised firms, seems to have gained traction, post-Covid. A recent ICICI Securities study finds that India Inc’s profits, which had dipped to 1.6 per cent of GDP in FY20 had climbed back to 4.6 per cent by FY22, with the trend expected to continue. It is also likely that some part of the gains in corporate tax collections have come from better voluntary compliance. As a part of the stimulus package for Covid, the Centre had effected a sharp cut in the corporate tax rate from over 30 per cent to 22 per cent, if companies opted to give up exemptions. A recent Action Taken report submitted to Parliament showed that about 15.8 per cent of the corporate return filers accounting for over 61.9 per cent of the declared income, have opted for this new regime. The tax cut shrank corporate tax mop-ups during Covid, but seems to be paying off now.
On personal income tax though, it appears to be fear of the stick that’s behind the 50 per cent surge in collections. With the concerted digital push and the taxman tightening reporting structures around high-value transactions while deploying technology to track money trails, the wiggle room for individual taxpayers to evade tax has shrunk considerably. The CBDT’s recent initiatives to present taxpayers with an auto-populated Annual Information Statement and 26AS have reduced scope for under-reporting of income. Having tightened the screws on individual taxpayers though, it may be time for the Centre to consider some carrots, in the form of lower personal tax rates or a more friendly exemption-free regime in the days ahead.