In the first four months of this fiscal, the direct tax mop-up is up by only about 9.7%, although tax officials say collections typically pick up at a faster pace in the second half of a fiscal and, if that happens, this initial shortfall can be easily erased.
The government may have to forgo as much as Rs 1.2 lakh crore in revenue a year if it were to cut tax rates in accordance with the recommendations the direct tax code (DTC) task force is understood to have made in its report submitted with finance minister Nirmala Sitharaman on Monday, analysts said. However, the potential revenue forgone could be substantially reduced if exemptions extended to both companies and individuals are fully withdrawn, they added.
The Akhilesh Ranjan-led panel’s report is learnt to have proposed that the corporation tax rate be slashed to 25% across the board, including for foreign companies that currently pay about 40% tax. Any such reduction would essentially bring down rates for 0.7% of all firms that are currently paying taxes at 30%. However, these large companies contribute about 75-80% of total corporation tax collections, and a cut in their tax rate would bring down their contribution by an estimated Rs 90,000 crore annually.
“The government forgoes about 16-17% of total corporation tax collected in a year by way of exemptions. In the last fiscal, total revenue foregone due to SEZ deductions and accelerated deductions was about Rs 1 lakh crore. So, one quick arithmetic could be the withdrawal of these deductions to offset the fall in tax collections due to the rate cut,” Sanjay Kumar, senior director at Deloitte India said.
However, he added that the withdrawal of exemption would require a tight-rope walk for the government as these exemptions provide important incentives to industry. For instance, benefits of accelerated depreciation allows firms to modernise equipment leading to efficiency, while tax benefits to special economic zones are crucial for exports.
As per the FY20 Budget estimate, the direct tax collection target stands at Rs 13.35 lakh crore, over 17% higher than the actual collection in the last fiscal. In the first four months of this fiscal, the direct tax mop-up is up by only about 9.7%, although tax officials say collections typically pick up at a faster pace in the second half of a fiscal and, if that happens, this initial shortfall can be easily erased. In FY19, the direct tax revenue fell fell short of the Budgetted target by Rs 63,000 crore largely due to a slippage in the personal income tax collection.
The DTC report is also believed to have proposed a drastic cut in personal income tax as well, which would likely benefit individuals earning up to Rs 50 lakh annually. However, the details of the proposed slabs are not available, given that the report is not publicly available yet. Tax experts said depending on different permutations of rates and slabs, the revenue forgone could be as much as Rs 30,000 crore a year.
Additionally, the report has also likely proposed that dividend distribution tax (DDT) be taxed only in the hands of recipient and not in the hands of distributors as is the case today. Moreover, people who were part of the consultations over the past year indicated that there would be sops for start-ups and some changes relating to the taxation rules for foreign companies. Many of the recommendations deal with simplifying the rules and procedures and are aimed at making it easier for taxpayers.
While rate cuts could lead to an immediate drop in direct tax mop-up, experts said that measures such as better info sharing among indirect and direct tax departments, faceless assessment and filing of appeals for litigations being done by a different group of tax officers could improve tax collection in the long term.
Daksha Baxi, head (international taxation) at Cyril Amarchand Mangaldas, said: “The negotiated settlement of tax litigation would result in resolving bulk of pending litigations, thereby release a huge amount of locked-up tax revenue. Besides, governments benefit from the Laffer curve, which says that lowering the tax rate usually results in better compliance and thereby increased tax collections at lower costs.”