Waning Base Effect: Direct tax revenues down a fifth in October

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November 09, 2021 4:45 AM

Gross direct tax collections (net of refunds, but before devolution to states) grew an impressive 70% on year in April-October of the current financial year to Rs 6.45 lakh crore, according to data gathered by FE. However, the growth rate has been slowing over months.

Robust revenues helped the Centre to contain its fiscal deficit in the first half of the current fiscal at 35% of annual budget estimate (BE) compared with 114.8% a year ago and 92.6% in FY20.Robust revenues helped the Centre to contain its fiscal deficit in the first half of the current fiscal at 35% of annual budget estimate (BE) compared with 114.8% a year ago and 92.6% in FY20.

Growth in tax collections has been beating other macro-economic indicators, but it seems the trend is coming to an end, with the petering out of the advantage of low base. The Centre’s tax kitty has been swelling in recent months, giving it great comfort as it presides over an economy which is still in the throes of regaining footing.

Gross direct tax collections (net of refunds, but before devolution to states) grew an impressive 70% on year in April-October of the current financial year to Rs 6.45 lakh crore, according to data gathered by FE. However, the growth rate has been slowing over months. On an annual basis, these collections grew 103% on year in July, 66% in August, 59% in September, but saw a decline of 21% in October, reflecting the fizzling out of the low base effect. Tax collections had improved in the year-ago period, after Covid-induced lockdown was lifted.

Advance taxes in Q1 (due on June 15) and Q2 (due on September 15) together grew 56% on year to Rs 2.53 lakh crore and up 15% over the corresponding period in FY20. More and more taxpayers are now paying income taxes on time due to better compliance facilitated by tax deduction at source (TDS) and tax collection at source (TCS) rules.

The net collections (post-devolution) must have grown at an even higher rate in April-October, given that larger resort to cesses and surcharges have in recent years ensured that the Centre’s net tax revenue grew faster than its gross (pre-devolution) tax receipts.

In fact, the gross direct tax collections in the first seven months of FY22 were 23% higher than in the corresponding period of pre-pandemic year, FY20. The Centre had targeted a 17% annual growth to in gross direct tax collections to achieve the FY22 budget target of Rs 11.08 lakh crore.

Even indirect tax collections are growing at a fast clip. Gross goods and services tax (GST) collections came in at Rs 1,30,127 crore in October (September sales), the second highest mop-up in the history of the comprehensive indirect tax that was launched in July 2017. The GST revenues for October were 24% higher than these in the same month in FY21 and 36% over the level in the corresponding month in FY20.

A greater formalisation of the economy, enabled by demonetisation, GST, and a series of anti-evasion steps have boosted compliance and tax revenue. So, indicators — tax collections and the stock market – are showing must faster growth than other macro-economic indicators suggest.

According to official sources, direct tax collections would get a further boost in the coming weeks from the launch of Annual Information Statement (AIS) of taxpayers detailing their financial transactions. This information base gives a subtle message to taxpayers to voluntary pay up taxes that are due.

On November 1, the income tax department rolled out the new AIS on the compliance portal which provides a comprehensive view of information to a taxpayer with a facility to capture online feedback. AIS is more comprehensive than the earlier Form 26AS as it will contain more information about financial transactions of taxpayers beyond the TDS and TCS transactions.

On tax revenue growth exceeding the overall economic performance, revenue secretary Tarun Bajaj told FE recently that a combination factors, including a trend towards greater formalisation – and much better compliance were boosting the revenues.

“We have collected a lot of information (on likely income profiles based on spending patterns and sales) about the taxpayers, and are playing it back to them, making them voluntarily pay the (full) taxes. We have ensured better compliance,” Bajaj had said.

Separately, another official told FE that the Centre’s net tax collections (pre-excise duty cuts on petrol and diesel which will likely cost the government Rs 65,000 crore) could exceed budget target by about Rs 2 lakh crore in FY22, largely covering the additional fiscal cost of stimulus measures announced by the government so far.

An expansion of the goods and service tax (GST) taxpayer base helped boost direct taxes too. Since GST information is shared with the income tax department, it is more difficult now for taxpayers to evade or underpay taxes.

Robust revenues helped the Centre to contain its fiscal deficit in the first half of the current fiscal at 35% of annual budget estimate (BE) compared with 114.8% a year ago and 92.6% in FY20.

According to rating agency Icra chief economist Aditi Nayar: “In our assessment, the GoI’s fiscal deficit in FY22 is likely to be lower than budgeted, the extent of which will be driven by the size of the disinvestment inflows that are eventually realised. We expect the GoI’s fiscal deficit to print at Rs 13.8-14.8 trillion or 6.0-6.5% of GDP in FY2022, as compared to the budgeted Rs 15.1 trillion.”

Commenting on the H2 borrowing plan announced on September 27, India Ratings chief economist Devendra Kumar Pant recently said, “interestingly, the centre is still maintaining Rs 1.81 lakh crore surplus cash balance with RBI at end-September 2021 (end-March 2021: Rs 1.82 lakh crore). With such a huge cash surplus with RBI, the Centre is on a strong wicket to either improve expenditure or reduce market borrowing.” The fiscal deficit is expected to be 6.6% of GDP for FY22 against BE of 6.8%, Pant had said.

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