Prime minister Narendra Modi’s image is featured on a wooden spool displayed for a photograph by a kite vendor in the Delhi Darwaza area of Ahmadabad, Gujarat, India, on Monday, Dec. 14, 2015. (Photographer: Dhiraj Singh/Bloomberg)

What Explains The 22% Surprise Rise In India’s Tax Revenue 

Finance Minister Arun Jaitley was all smiles on Tuesday, January 9, as he announced a 12 percent increase in direct tax collections and a 25 percent increase in indirect tax collections, for the April - December 2016 period compared to the same period last year.

April - December 2016

  • Direct Tax: Rs 5,53,000 crore (Up 12 percent)
  • Indirect Tax: Rs 6,30,000 crore (Up 25 percent)

At a time when private estimates of economic growth are being scaled down, how should these tax numbers be interpreted? Have they been distorted by the demonetisation decision and a rush to deposit old notes? Do they factor in the full impact of demonetisation on the economy?

Indirect Taxes

Indirect taxes, namely excise duty and service tax, have provided the big surge in revenue.

  • Excise duty revenue for the nine-month period is up 43 percent.
  • Service tax revenue is up almost 24 percent.
  • But customs duty collections disappointed - increasing a feeble 4 percent.

Excise Duty

The excise duty revenue target for FY17 is Rs 3,18,670 crore, a 12 percent increase over FY16.
Of that, Rs 2,79,000 crore has already been collected in the April - December 2016 period versus Rs 1,95,000 crore in the same period last year, up 43 percent.

Veteran tax expert Mukesh Butani, chairman of BMR Advisors, partly attributes the spectacular increase in excise collections to the additional duties levied on fuel, quite like in 2015.

A spurt in excise duty collection could be attributable to the ad-valorem basis of charging excise duties on petroleum products, which contribute roughly 40-45 percent of collections. You would have witnessed three minor jumps in petroleum prices in the last few months, due to the international price of crude that was hovering around $40, touching 50. The government has been periodically passing on the increase by way of increase in retail prices, which is contributing to a healthy excise duty collection. 
Mukesh Butani, Chairman, BMR Advisors

Harishanker Subramaniam, indirect tax leader at EY, ascribes the jump in excise collections to the advance purchases of goods right after the demonetisation announcement on November 8.

Demonetisation did witness a behaviour of advance purchases of goods to expend old currency, specially in November 2016, which would have had an impact on both excise and VAT (Value Added Tax) collections. Excise collections may also have gone up due to an increase in petrol consumption as the outlets were allowed to deal in older currency for a period of time. Even in case of services, examples of advance purchases were seen and would have equally contributed. So overall demonetisation would have had a salutary impact on collections, specially in November.
Harishanker Subramaniam, Indirect Tax Leader, EY

Service Tax
The service tax revenue target for FY17 is Rs 2,31,000 crore, a 10 percent increase over FY16.
Of that, Rs 1,83,000 crore has been collected in the April - December 2016 period versus Rs 1,48,000 crore in the same period last year, up 23.9 percent.

Ameet Patel, tax partner at Manohar Chowdhry & Associates, says the across board buoyancy in tax revenue does not surprise him. He insists, based on his travels across the country and conversations with clients, that “demand is robust throughout India”.

If business is doing well, naturally, profits will be better and therefore taxes would also be higher. Service sector is doing well. In many cases, the earnings are in dollars. Since the exchange rate of the U.S. dollar has gone through the roof, earnings are also higher. This has boosted toplines in many cases.
Ameet Patel, Partner, Manohar Chowdhry & Associates

Jigar Shah, tax partner at SKP, points to last year’s increase in service tax, from 14.5 percent to 15 percent, on account of the Krishi Kalyan cess as one reason for higher tax revenue from the services sector. But he admits the amount may not be significant.

Butani points to the sector’s “greater resilience” and also wonders if the service tax revenue includes collections via the indirect tax dispute resolution scheme introduced last year.

In 2016-17, besides the imposition of Krishi Kalyan and Swachh Bharat cess, the services sector has not been as adversely impacted as the manufacturing sector and though the growth rate has not been robust, it did show greater resilience compared to manufacturing. In addition, the Union Budget 2016 pruned exemption notifications and also pared rebate provisions for certain sectors. It is also not clear how many taxpayers availed of the service tax amnesty and how much was collected. You should presume very little. All in all, this is positive.
Mukesh Butani, Chairman, BMR Advisors

Customs Duty

The customs duty revenue target for FY17 is Rs 2,30,000 crore, a 10 percent increase over FY16.
Of that, Rs 1,67,000 crore has been collected in the April - December 2016 period versus Rs 1,60,000 crore in the same period last year, up 4.1 percent.

The government’s media statement attributes the lower customs revenue to a 46 percent decline in gold import volumes in December 2016 versus December 2015.

Jigar Doshi, tax partner at SKP agrees.

We second the government’s analysis on limited customs growth. As per the data provided by an official document on imports it is noticed that the value of gold imports has dipped tremendously as compared to the April - December 2015 period. April - December 2015 saw gold imports worth Rs 1,23,019 crore as compared to Rs 76,221 crore in the April - December 2016 period. Clearly attributing to a dip in import collections from gold imports.
Jigar Doshi, Tax Partner, SKP
Customs duty is a direct outcome of imports and though the budget had estimated an increase of 10 percent on the back of slow growth in the economy, what has turned out is an even more disappointing year for imports – capital goods and raw materials – suggestive of slowness and weak turnaround in corporate performance. There was slowness in gold imports, but there was a sudden spurt in November/December post demonetisation. So, one can’t assess the impact of gold imports and I doubt if it is as linked as the petroleum taxes.
Mukesh Butani, Chairman, BMR Advisors

Direct Taxes

It’s not all good news for direct taxes in the first nine months of FY16.

  • Personal income tax revenue rose by 24.6 percent, net of refunds.
  • But corporate tax revenue increased by a mere 4.4 percent, net of refunds.

A media statement issued by the government explains that, at Rs 1,26,371 crore, the refunds issued in the period are 30.5 percent more than in the same period last year.

Personal Income Tax
The personal income tax revenue target for FY17 is Rs 3,53,174 crore, an 18 percent increase over FY16.
While the government has not released a number for the personal income tax revenue collected in April - December 2016, it claimed a year-on-year increase of 21.7 percent, before refunds.

But then 2016 was witness to two income disclosure schemes of which one is still underway and a rush to deposit old currency notes, all of which tax experts say have led to higher than estimated revenue.

With the government making its intent clear on going after black money and tax evaders, many people would have increased their personal tax payments especially the December installment of Advance Tax. The other reason for an increase in the numbers could be tax collections on account of Income Disclosure Scheme 2016. We are not sure whether these collection numbers released by the government include collections on account of IDS. The IDS disclosures were around Rs 67,000 crore and the government expected around Rs 30,000 crore in taxes. Of this, 25 percent ie: Rs 7,000-8,000 crore would have been deposited by November 30, which could be one reason for the spurt in personal tax collection numbers.
Jigar Doshi, Tax Partner, SKP

Butani adds, “Post the announcement of demonetisation, it is widely speculated that IDS declarants have preponed tax payments (by utilising old notes), which were otherwise payable at the end of 2016 and 2017.”

Patel refers to the large number of raids and surveys by the tax department as another reason why collections are up substantially.

Apart from this, the CPC (Centralised Processing Centre of the Income Tax Department) has been very busy adjusting old tax demands against new refunds. It would be useful to get this statistic from the tax department. Based on personal experience, substantial amounts have been adjusted in this fashion by the income tax department. This year, the pace has been much faster and aggressive. This would have also impacted the net collections.
Ameet Patel, Partner, Manohar Chowdhry & Associates

Corporate Income Tax
The corporate income tax revenue target for FY17 is Rs 4,93,923 crore, a 9 percent increase over FY16.

While the government has not released a number for the corporate tax revenue collected in April - December 2016, it claimed a year-on-year increase of 10.7 percent, before refunds.

The trend on corporate income tax is muted at just 4 percent (you have to measure this net of tax refunds) as against 9 percent budget estimates. I doubt if the impact of demonetisation is factored in since that could be felt in the March advance tax installment when the financial results of the second two quarters will be available. Corporate income tax collections could further fall and miss the target by a larger margin as there is no turnaround visible, besides the impact of demonetisation, though, the overall direct tax target could be met. The weight of corporate income tax to personal income tax is roughly 60:40 and hence, hence the increase in personal income tax has to be more than the fall in corporate income tax to meet the overall targets.
Mukesh Butani, Chairman, BMR Advisors

So, Good News Or Bad?

In summary

  • The Union Budget 2016 estimated an 11.7 percent increase in gross tax revenue from Rs 14,59,611 in FY16 to Rs 16,30,888 crore in FY17.
  • The April - December 2016 period shows a 22 percent increase in gross tax revenue to Rs 11,83,000 crore versus Rs 9,63,229 crore in the same period 2015.
  • And there’s more to come from the PMGKY as well as the various black money ops in progress.

The higher tax revenue may be cause for celebration as it gives the government more spending room. But meagre increases in customs duty and corporate tax collections continue to cloud this silver lining. Less from a revenue perspective and more as an indicator of economic growth.
And while the early impact of demonetisation, that is the rush to spend or deposit old currency notes, may have helped the April - December numbers, the slowdown in growth prompted by the cash crunch will only be visible in the full year data.

Stay Updated With Business News News On BloombergQuint