The Big Tax Haul

India had a spectacular run in tax collection during the first seven months of this fiscal year, a period that also witnessed a raging wave of the Covid-19 pandemic. Between April and October, GoI’s gross mop-up was ₹13.64 lakh crore, an impressive 30% rise over the same period in the pre-pandemic FY20. Meanwhile, let us ignore another figure — a 56% rise, year-on-year, over the worst-hit FY21 — as such a comparison will distort the picture due to low-base effect.

Having analysed the direct tax numbers till December 6, Chairman of the Central Board of Direct Taxes JB Mohapatra said that the current upward trend will continue. “We will achieve the ₹11.08 lakh crore BE (budget estimate),” he says. “The growing formalisation of our economy has a positive impact on better tax collection. There is no denying that.” As far as the Centre’s indirect tax collection is concerned, the growth between April and October was 34% y-o-y over FY20, boosted by a 79% rise in Union excise duty (mainly taxes on petroleum products) and a 74% increase in customs, among others.

What are the factors that have contributed to such a robust tax growth in the middle of a pandemic? After all, in absolute terms, India’s gross domestic product (GDP) in the first half of the current fiscal (₹68.11 lakh crore, at constant prices) is still below that of FY20 (₹71.28 lakh crore). So, how has GoI’s tax collection surged by 30% in the seven months of this year over the same period pre-pandemic, when the nation’s total output has yet to return to pre-Covid levels?

There are multiple reasons why the two graphs, of GDP and tax collection, are moving asymmetrically. Sudhir Kapadia, tax leader of EY India, gives three reasons for the high revenue numbers — one, digitisation and formalisation of the economy; two, large companies’ enhanced productivity and cost optimisation during the pandemic; and three, the phenomenal growth in select sectors of the economy such as technology, pharmaceuticals and FMCG, which were galvanised by the pandemic situation itself. EY India’s analysis shows that revenue from corporate income tax jumped by 21% in April-October FY22 compared with the prepandemic April-October FY20. Such a high growth is particularly noticeable as the average growth in CIT for the three-year period between FY17 and FY19 was only 13.7%.

Let us take a close look at some of the tax numbers and the trends therein. If we compare April-October FY22 with April-October FY20, the growth in indirect tax (34%) was way higher than that of direct tax (25%). The category called “other taxes”, which mainly includes securities transaction tax (STT), was up by 103% during the same period, reflecting the bustle in the bourses.

In the case of GST, the monthly gross collection (including the state’s share) fell below ₹1 lakh crore only once in this fiscal — in June, when it dropped to ₹92,849 crore. In April-October, the Centre’s share, CGST, grew by 10.5%, while the integrated goods and services tax (IGST), which is levied on interstate purchases or supplies and on imports, grew by 160% — both are over the pre-pandemic period.

“GST collection has seen an uptick with the opening up of the economy,” says Vikas Vasal, national managing partner, tax, Grant Thornton. “This trend is likely to continue as new businesses, including startups, are getting established and existing businesses are expanding due to higher demand for their goods and services,” he adds.

Sushil Modi, former deputy chief minister of Bihar who had also earlier chaired the empowered panel of state finance ministers on GST, says the monthly collection may eventually rise to ₹1.5 lakh crore and beyond. “GST collection will rise even further as leakages have been tightened to a great degree. The use of technology is also playing a role here. I think the monthly collection should cross ₹1.5 lakh crore sometime next fiscal,” he says. Till now, the highest monthly GST figure, ₹1.4 lakh crore, was collected this April.

There has been a distinct shift of market share from informal to formal sector during this pandemic, a reason why the graph on tax collection has ascended so rapidly. Also, large companies have grabbed the market share being vacated by many micro, small and medium enterprises, which have either exited the scene or scaled down their production due to the pandemic.

According to ETIG data, the growth of tax paid during the first half of this fiscal, as compared with the same period two years ago, is over 100% for at least five Nifty 50 companies, e.g. Hindalco Industries (188%), Adani Ports and SEZ (157%), Tata Motors (118%), UPL (117%) and Indian Oil Corporation (107%). The companies which paid 40% or more tax during the same period (as compared with April-September 2019) include Cipla, Infosys, Tech Mahindra, UltraTech Cement, Shree Cement et al. Analysts say that many of these companies are paying a hefty tax because they could curtail expenses during the pandemic, thereby emerging as highly profitable entities. The biggies whose taxes are in negative during the same period include Maruti Suzuki, Bharti Airtel, Coal India, Sun Pharmaceuticals and SBI Life Insurance, according to the same database.

Former CBDT chairman R Prasad argues that the robust tax collection this year is mainly a reflection of the collapse of the informal sector as well as larger companies’ seizing of the space hitherto occupied by several small and medium enterprises. A recent report by SBI Research claimed that the share of the informal economy in India “may have shrunk to no more than 20% from 52% in FY18”. Though most economists agree that the share of the informal sector in India is indeed shrinking, some of them dispute the 20% figure, saying it’s unreasonably low.

Tax experts, however, claim that many small entities that were evading taxes earlier are now forced to pay as returns filed for GST and income tax are matched regularly. If a company underreports its purchases, it will lose out on input credits in the GST. And once a company becomes transparent to take advantage of GST’s benefits, the I-T department will have enough data to match the company’s actual income and expenditure with its direct tax returns.

Says Vasal of Grant Thornton: “An important factor for better tax collection is the increase in compliance due to better monitoring by revenue authorities with the aid of technology and the gradual shift of the informal sector into the formal economy.”

With North Block officials now drawing up the February 1 Budget, the question is whether Finance Minister Nirmala Sitharaman will modify the existing tax rates or introduce new taxes when GoI has been successful in garnering such hefty amounts of tax during this sombre period. Or, will she reduce tax slabs so that there will be more money in the hands of consumers?

Former CBDT chairman Prasad says, “I don’t think the FM will reduce tax rates in the coming budget. She may not tweak taxes at all.”

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