The government’s argument is that formalisation of the economy, aided by the GST and demonetization, has had a positive bearing on the tax buoyancy, even when the economy is witnessing growth pangs.
The direct tax buoyancy — a ratio of tax collection growth to nominal GDP growth — would stand at 1.12 for FY20 if revenue forgone due to corporate tax cuts is taken into account, the Central Board of Direct Taxes (CBDT) said. The government’s argument is that formalisation of the economy, aided by the GST and demonetization, has had a positive bearing on the tax buoyancy, even when the economy is witnessing growth pangs.
Of course, FY20 buoyancy was still lower than 1.21 achieved in FY19. Tax buoyancy is a measure of efficiency of tax mobilisation or ‘tax effort’, and if it is greater than 1, it indicates collections are rising faster than the GDP.
The gross direct tax collection (without deducting refunds) was Rs 12.34 lakh crore in FY20, lower than Rs 12.98 lakh crore in FY19.
The corporate tax cuts announced in September lowered collection by an estimated Rs 1.45 lakh crore. Additionally, in the Budget last year, income of up to Rs 5 lakh was exempted from tax, impacting collection by about Rs 23,000 crore, the CBDT said.
Further, the board said gross direct tax collections were a better measure to ascertain buoyancy as they negated anomalies created by higher refunds granted in FY20 compared to the year before. It said Rs 1.84-lakh-crore refund was granted in FY20, compared with Rs 1.61 lakh crore in FY19, a 14% increase year-on-year.
Additionally, the CBDT said buoyancy of two heads of direct taxes came in at almost 1 for corporate tax and 1.32 for personal income tax. “These buoyancies indicate that the growth trajectories of both the arms of direct taxes i.e. corporate tax and PIT are intact and are rising steadily. Further, the higher growth rate in direct taxes as compared to growth rate in the GDP even in these challenging times proves that recent efforts for the widening of the tax base undertaken by the government are yielding results,” the CBDT said.
It added any pick-up in investment subsequent to tax cuts would take time as manufacturing facilities with its ancillary activities take months to come up. “The tax reforms were announced in September 2019 and the results are expected to be visible in the next few months and in years to come. The outbreak of COVID-19 may further delay this process, but the growth in production due to these tax reforms is bound to happen and cannot be stopped,” the Board said.
Last year, the government had cut the corporate tax rate to 22% from 30% for existing domestic companies. It had allowed 15% tax rate for new manufacturing facilities and abolished minimum alternate tax (MAT) for firms choosing the tax new regime of lower taxes without exemptions. For others, MAT was cut to 15% from 18.5%.