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The great Indian tax paradox: Can the tax mop-up keep its pace in the current fiscal?
Simple financial wisdom would tell you — when an economy shrinks, tax collection falters. When the contraction is unprecedented amid a crushing global pandemic, the fallout on tax revenue should be devastating. But India bucked this trend in the last fiscal year. In the Covid-hit, bruised FY 2020-21, the central government mopped up an additional tax revenue of Rs 67,133 crore, a 4.9% rise y-o-y, according to data released by the Controller General of Accounts (CGA), forcing tax experts and analysts to wonder what could be the trigger for this unusual financial occurrence. In fact, the actual collections turned out to be 5.9% higher than the revised estimate made by Finance Minister Nirmala Sitharaman in her budget presented on February 1.
The first question that goes to the heart of the paradox is, what caused such a healthy tax growth in a fiscal that witnessed a wrecking ball of a 7.3% contraction of national income, the first such annual shrinkage in India’s gross domestic product (GDP) growth in four decades? The next question is, will this bewildering tax buoyancy continue in the current fiscal, which was brutalised by the pandemic’s second wave in April and May and which has to now brace for a potential third wave that scientists and virologists are warning about?
First, let’s figure out the drivers of tax growth in the last fiscal as well as the segments where collections tumbled. The tax growth in the last fiscal was propelled mainly by indirect taxes — a rise of 23% (Rs 25,473 crore in absolute terms) in customs, and another 62% (Rs 150,210 crore) in central excise duties — with a minor contribution emanating from a category in direct tax called “other taxes” that include security transaction tax (STT). Small wonder that as market indices scaled to a record high, “other taxes” saw an impressive 30% jump (Rs 4,903 crore). Three key factors — high gold imports during a pandemic (a 22.5% rise); unrestrained fuel price hike (petrol price, for instance, went past Rs 100 per litre in select cities this week); and massive transactions in the market— scripted the robust tax story during the last fiscal. Now, let’s come to the dampeners.
As far as the central share of the goods and services tax (GST) is concerned, there was a dip of Rs 37,723 crore, or 7.6% (CGST only), as compared with a year-ago period — a not-so-bad number, considering the government had announced a strict national lockdown, which massively impacted the first half of the fiscal. Corporate tax collection also dwindled by Rs 1 lakh crore, or about 18%, as compared with FY2019-20. That fall was mainly on account of slashed corporate tax rate, up to 22% from 30% earlier. Significantly, personal tax mop-up somehow managed to hold on, losing only 2.3% (Rs 11,122 crore) in a year that saw huge job losses, salary cuts and overall loss in income. According to Sudhir Kapadia, national tax leader of EY India, personal income tax collections did not collapse because, first, tax on dividend income shifted from companies to shareholders, and second, a new mechanism was adopted to match GST filings with income tax returns, which forced small proprietorships and partnership firms to show their income more accurately.
Taxes collected from such smaller firms are recorded in the personal income tax category alongside those from individual taxpayers. “Promoters, large shareholders, senior executives etc., are the ones who pay tax on dividends. They are anyway in the highest tax bracket at 43%,” says Kapadia, arguing why the total collection in the personal tax category was quite good (Rs 4.7 lakh crore) last fiscal. ET Intelligence Group (ETIG) data, factoring in the information available for 45 companies out of 50 in the benchmark stock index Nifty, shows a massive 71% jump in income tax payout, from Rs 1,28,864 crore in FY 2019-20 to Rs 1,56,416 crore in FY 2020-21, indicating how major Indian companies ended up paying more taxes even as rate was lowered, also acting as a bulwark against a steep fall in overall corporate tax collection.
Some Nifty companies that stood out in the rise of tax payment, in percentage terms, last year, include BPCL (Rs 5,112 crore in FY 2020-21, a growth of 36,076%), Grasim Industries (Rs 3,022 crore, a rise of 3,684%), JSW Steel (557%), UltraTech Cement (547%), Tata Steel (321%), IOC (269%). In absolute terms, some of the top corporate taxpayers were TCS, HDFC Bank, IOC, Bharti Airtel and SBI. “Some big companies have performed exceptionally well during the pandemic as they have taken over the space vacated by small and medium enterprises,” says R Prasad, former chairman, Central Board of Direct Taxes (CBDT). Looking forward, he argues, indirect tax rates need to be slashed for some items. “That will help consumers buy more. Also, high excise duties on fuel are inflationary. That needs some changes,” he adds.
Another former CBDT chairman, Sudhir Chandra, argues that if some of the Rs 1.75 lakh disinvestment targets are met in the first half of the fiscal itself, tax collections are bound to improve. “Also, government expenditure, especially directed at turning around stressed assets, should be encouraged. Further, a focus on recovery of about Rs 18.5 lakh crore arrears may contribute to a robust collection in direct tax,” he adds. With the second wave of the pandemic still raging in several states, this fiscal, too, won’t be easy for tax sleuths. EY’s Kapadia outlines possible scenarios for the current fiscal.“In FY 2021-22, assuming there is no significant third wave of the pandemic, the next three quarters will fare far better than the first one.
There should be an uptick in corporate tax collection as the effect of lower tax rate got settled in. In the indirect tax space, the windfall of excise on fuel is unlikely to continue. On GST, there could be a rise as the overall scope for leakage is going down, thanks to initiatives such as einvoicing,” he says. Economist and former chief statistician of India Pronab Sen, however, paints a gloomy scenario for this fiscal. He says this year will be far more challenging than the one gone by: “We are at a crossroads where the non-corporate sector still remains low and the second and subsequent waves may hit the corporate sector, too.
In that case, corporate tax collection will also be affected. What we don’t know yet is the extent of that damage.” Is there a middle path where the nation continues to accumulate more taxes without burdening excessively its citizens who have been battered by the pandemic? Sen replies, “Any reduction in direct tax is not going to help much now. But if GST rates are slashed on select items, it will be an incentive for consumers to buy more with whatever limited savings they have.” Higher consumption will incentivise factories to produce more which will help restart the economy and create more jobs.
Augmenting tax collection is critical. If the pandemic continues, pro-poor schemes will need more resources. Ramping up the heath infrastructure to prepare for a third wave will also need money. But can the government expect a repeat of last year’s windfall of an extra Rs 1.5 lakh crore from excise duties? It is highly unlikely. If international oil prices rise further, the government will be forced to rein in the retail prices by shedding some of its own share of taxes. The challenge will be to find the right balance between an ambitious tax target and incentivising its citizens to spend more and spur the economy
Simple financial wisdom would tell you — when an economy shrinks, tax collection falters. When the contraction is unprecedented amid a crushing global pandemic, the fallout on tax revenue should be devastating. But India bucked this trend in the last fiscal year. In the Covid-hit, bruised FY 2020-21, the central government mopped up an additional tax revenue of Rs 67,133 crore, a 4.9% rise y-o-y, according to data released by the Controller General of Accounts (CGA), forcing tax experts and analysts to wonder what could be the trigger for this unusual financial occurrence. In fact, the actual collections turned out to be 5.9% higher than the revised estimate made by Finance Minister Nirmala Sitharaman in her budget presented on February 1.
The first question that goes to the heart of the paradox is, what caused such a healthy tax growth in a fiscal that witnessed a wrecking ball of a 7.3% contraction of national income, the first such annual shrinkage in India’s gross domestic product (GDP) growth in four decades? The next question is, will this bewildering tax buoyancy continue in the current fiscal, which was brutalised by the pandemic’s second wave in April and May and which has to now brace for a potential third wave that scientists and virologists are warning about?
First, let’s figure out the drivers of tax growth in the last fiscal as well as the segments where collections tumbled. The tax growth in the last fiscal was propelled mainly by indirect taxes — a rise of 23% (Rs 25,473 crore in absolute terms) in customs, and another 62% (Rs 150,210 crore) in central excise duties — with a minor contribution emanating from a category in direct tax called “other taxes” that include security transaction tax (STT). Small wonder that as market indices scaled to a record high, “other taxes” saw an impressive 30% jump (Rs 4,903 crore). Three key factors — high gold imports during a pandemic (a 22.5% rise); unrestrained fuel price hike (petrol price, for instance, went past Rs 100 per litre in select cities this week); and massive transactions in the market— scripted the robust tax story during the last fiscal. Now, let’s come to the dampeners.
As far as the central share of the goods and services tax (GST) is concerned, there was a dip of Rs 37,723 crore, or 7.6% (CGST only), as compared with a year-ago period — a not-so-bad number, considering the government had announced a strict national lockdown, which massively impacted the first half of the fiscal. Corporate tax collection also dwindled by Rs 1 lakh crore, or about 18%, as compared with FY2019-20. That fall was mainly on account of slashed corporate tax rate, up to 22% from 30% earlier. Significantly, personal tax mop-up somehow managed to hold on, losing only 2.3% (Rs 11,122 crore) in a year that saw huge job losses, salary cuts and overall loss in income. According to Sudhir Kapadia, national tax leader of EY India, personal income tax collections did not collapse because, first, tax on dividend income shifted from companies to shareholders, and second, a new mechanism was adopted to match GST filings with income tax returns, which forced small proprietorships and partnership firms to show their income more accurately.
Taxes collected from such smaller firms are recorded in the personal income tax category alongside those from individual taxpayers. “Promoters, large shareholders, senior executives etc., are the ones who pay tax on dividends. They are anyway in the highest tax bracket at 43%,” says Kapadia, arguing why the total collection in the personal tax category was quite good (Rs 4.7 lakh crore) last fiscal. ET Intelligence Group (ETIG) data, factoring in the information available for 45 companies out of 50 in the benchmark stock index Nifty, shows a massive 71% jump in income tax payout, from Rs 1,28,864 crore in FY 2019-20 to Rs 1,56,416 crore in FY 2020-21, indicating how major Indian companies ended up paying more taxes even as rate was lowered, also acting as a bulwark against a steep fall in overall corporate tax collection.
Some Nifty companies that stood out in the rise of tax payment, in percentage terms, last year, include BPCL (Rs 5,112 crore in FY 2020-21, a growth of 36,076%), Grasim Industries (Rs 3,022 crore, a rise of 3,684%), JSW Steel (557%), UltraTech Cement (547%), Tata Steel (321%), IOC (269%). In absolute terms, some of the top corporate taxpayers were TCS, HDFC Bank, IOC, Bharti Airtel and SBI. “Some big companies have performed exceptionally well during the pandemic as they have taken over the space vacated by small and medium enterprises,” says R Prasad, former chairman, Central Board of Direct Taxes (CBDT). Looking forward, he argues, indirect tax rates need to be slashed for some items. “That will help consumers buy more. Also, high excise duties on fuel are inflationary. That needs some changes,” he adds.
Another former CBDT chairman, Sudhir Chandra, argues that if some of the Rs 1.75 lakh disinvestment targets are met in the first half of the fiscal itself, tax collections are bound to improve. “Also, government expenditure, especially directed at turning around stressed assets, should be encouraged. Further, a focus on recovery of about Rs 18.5 lakh crore arrears may contribute to a robust collection in direct tax,” he adds. With the second wave of the pandemic still raging in several states, this fiscal, too, won’t be easy for tax sleuths. EY’s Kapadia outlines possible scenarios for the current fiscal.“In FY 2021-22, assuming there is no significant third wave of the pandemic, the next three quarters will fare far better than the first one.
There should be an uptick in corporate tax collection as the effect of lower tax rate got settled in. In the indirect tax space, the windfall of excise on fuel is unlikely to continue. On GST, there could be a rise as the overall scope for leakage is going down, thanks to initiatives such as einvoicing,” he says. Economist and former chief statistician of India Pronab Sen, however, paints a gloomy scenario for this fiscal. He says this year will be far more challenging than the one gone by: “We are at a crossroads where the non-corporate sector still remains low and the second and subsequent waves may hit the corporate sector, too.
In that case, corporate tax collection will also be affected. What we don’t know yet is the extent of that damage.” Is there a middle path where the nation continues to accumulate more taxes without burdening excessively its citizens who have been battered by the pandemic? Sen replies, “Any reduction in direct tax is not going to help much now. But if GST rates are slashed on select items, it will be an incentive for consumers to buy more with whatever limited savings they have.” Higher consumption will incentivise factories to produce more which will help restart the economy and create more jobs.
Augmenting tax collection is critical. If the pandemic continues, pro-poor schemes will need more resources. Ramping up the heath infrastructure to prepare for a third wave will also need money. But can the government expect a repeat of last year’s windfall of an extra Rs 1.5 lakh crore from excise duties? It is highly unlikely. If international oil prices rise further, the government will be forced to rein in the retail prices by shedding some of its own share of taxes. The challenge will be to find the right balance between an ambitious tax target and incentivising its citizens to spend more and spur the economy
