Watch 2022-23. In terms of fiscal dynamism, which is an indicator of the responsiveness of tax growth to the pace of the economy, the PPI performed much better than the corporate income tax (IRS). If we look at the net inflow of CIT in the last financial year (Rs 825,834 crore in total), the buoyancy was only 1, whereas in the case of PIT (Rs 808,221 crore), the buoyancy was 1 ,2. A tax float of 1 means that the rate of tax collection is equal to the growth of nominal gross domestic product (GDP). Greater than 1 means tax catch-up is growing faster than the economy, while a number less than 1 indicates slower growth in tax collection relative to economic growth.
When it comes to corporate tax momentum over the past decade, it has repeatedly slipped below 1 – for example, in six consecutive years from FY12 to FY17. It increased the following two years to fall back in 2019-20, this time into negative territory (-2.5). “In fiscal 2020, the decline in CIT momentum may be due to the combined impact of the economic downturn and the lower CIT rate,” says an Ernst & Young (EY) analysis. The analysis focuses on the net collection, ie the tax after reimbursement.
The IRP’s buoyancy has also slipped below the threshold at times, for example in fiscal 2015 and 2016, but has been above 1 for several years, including the past two years, indicating strong fundraising. personal taxes.
Why has India’s corporate tax raking not kept pace with personal income tax collection? Should the share of corporate tax in GDP, at 3% in FY23, be considered satisfactory having reached much higher levels in previous years (from order of 3.2 to 3.9% during FY11-FY19)? The tax experts and income tax analysts ET spoke to are unanimous that corporate tax collection seems slow and stagnant as the IRP cleanup has been extraordinary for multiple reasons, including the efficiency of digital tools, better compliance and a sharp increase in salaries in certain service sectors. They also say that the corporate tax rate, which was lowered from 30% to 25% in 2019, and the 15% concession offered to new manufacturing companies should not be changed in the near future, as this will be interpreted such as India’s unstable fiscal policy. . Moreover, according to them, the corporate tax catch-up is still satisfactory and has not slipped into the red zone.
Vikas Vasal, tax partner of Grant Thornton Bharat, lists a number of reasons behind the high PIT collection even after the Covid-19 outbreak. “Rising wages across all sectors, particularly the high-paying service sector, increased formalization of the economy, and job creation in the organized sector post-Covid have all contributed to tax collections on businesses. high individuals,” he said. It also highlights other factors such as collecting information from multiple sources such as annual information return, withholding tax (TDS) for individuals on sale and l purchase of properties, better TDS compliance on wages through increased awareness and enforcement and the new, simplified tax regime.
Another tax practitioner, Sudhir Kapadia, says the level of CIT compliance has always been high. “But thanks to some tax digitization transformation measures taken by the government, the level of compliance with the PIT has also improved significantly,” says Kapadia, Partner, Tax and Regulatory Services, EY. He adds that the current buoyancy of the CIT is satisfactory.
AND AFTER ?
Will the current trend of CIT and PIT growth continue in the short term or will the charts behave differently? Rohinton Sidhwa of Deloitte India says, “SI growth will continue at 14-15%. The IRP should show better earnings simply because of better compliance and more taxpayers. »
Currently, the lion’s share of CIT comes from a handful of large conglomerates. According to the ETIG database, of 4,600 listed companies, 22 contributed 50% of the tax in FY23. During the year, the top 10 corporate taxpayers, in descending order, were Reliance Industries , State Bank of India, HDFC Bank, Tata Consultancy Services, ICICI Bank, Power Finance Corporation, Bajaj Finserv, Coal India, Vedanta and Tata Steel. In FY22, a year hit by the second deadly wave of the pandemic, 21 companies paid taxes of Rs 5,000 crore and above, accounting for 46.5% of the total tax paid by listed entities.
Until June 17 of the current fiscal year, for which data is available, the gross collection of direct taxes (before adjustment for refunds) recorded a growth of 12.7% compared to the corresponding period of the year. ‘last year. Gross corporation tax collected during the period – Rs 187,311 crore – decreased by 1.7% compared to the same period last year. The direct tax pool includes the collection of IRS, IRP and Securities Transaction Tax (STT), while the indirect tax largely covers the Goods and Services Tax (GST) .
First-quarter withholding tax growth of 13.7% is an early indicator of what appears to be continued growth in the current fiscal year, Deloitte’s Sidhwa said. Citing a recent report by the Parliamentary Standing Committee on Finance, EY’s Kapadia claims that the TDS, collection of tax at source (TCS) and withholding tax account for 90% of tax revenue. “With the increasing speed and scale of digitization in tax administration as well as the use of smart data analytics by the tax department, it is expected that PIT and CIT revenues will continue to grow. grow at a healthy pace,” he said.
“With the increasing speed and scale of digitization in tax administration as well as the use of smart data analytics by the tax department, it is expected that IRP and IRP revenues will IS continue to grow at a healthy pace”
R Prasad, former chairman of the Central Board of Direct Taxation (CBDT), said the government cut corporate tax in 2019 mainly to have tax parity with some of India’s competitors in Southeast Asia , for example Vietnam and Indonesia, and with the expectation that the extra money would be deployed in new businesses, which in turn will create more jobs.
“Unfortunately, private investment remained tepid after the pandemic even though corporate tax rates were reduced in 2019. On the PPI front, the working class continues to be the highest taxed category,” he adds.
The 15% corporate tax bracket for newly incorporated manufacturing companies is one of the lowest in the world.
For Vikram Doshi, a partner at Price Waterhouse & Co, this is a statement from the government that it is serious about seeking investment in the manufacturing sector. The government is unlikely to change corporate tax rates in the near future.
“Unfortunately, private investment remained tepid after the pandemic even though corporate tax rates were reduced in 2019. On the PPI front, the working class continues to be the highest taxed category”
However, the voices demanding more taxes from high-profit companies will only grow louder if big corporations hold back on their expansion plans and keep the cash on hand. The policy was criticized at the height of the pandemic when tax collection plummeted. The problem arises whenever there are reports of lukewarm private investment despite healthy conglomerate balance sheets. However, the government has made it clear that corporate tax policy, for the time being, will continue as is.
In this scenario, what could be the prospects for tax collection in the coming years?
Grant Thornton’s Vasal scores three points. First, with the increase in GDP, tax revenues are bound to increase in a similar proportion. Second, with the increased formalization of the economy, total tax revenue will increase rapidly. Third, the number of steps the government has taken to gather information and the use of data analytics to identify red flags are all working and will help improve the tax-to-GDP ratio in years to come.
With contributions from Shailesh Kadam