In Charts: How Tax Trends Changed In The Pandemic Year 
A vendor holds Indian rupee notes at his vegetable stall at the cotton and vegetable wholesale market in Nagpur, India. (Photographer: Dhiraj Singh/Bloomberg)

In Charts: How Tax Trends Changed In The Pandemic Year 

It’s not surprising that in a year when the economy contracted, the government would see a drop in its tax collections. What’s surprising is that the extent of that drop is less than what many had feared.

In particular two decisions had a bearing on tax trends. In September 2019, the government lowered the base corporate tax rate to 22% from 30%, and to 15% from 25% for new manufacturing companies. This kept collections of corporation tax low. In May 2020, the government raised the excise duty on petrol by Rs 10 per litre and on diesel by Rs 13 per litre, which helped provide a buffer to the government.

Together, these two decisions meant that indirect tax collections surpassed those from direct taxes in FY21. This was also a year that corporation tax collections were at par with those via personal income tax.

Overall, gross tax collections rose 0.73% in FY21 when nominal GDP contracted 3%. Collections benefitted from sharply higher excise revenue and improved inflows from customs duty.

The provisional estimates for tax collections were higher than the revised estimates presented in the Union Budget. This, in turn, helped keep the central government’s fiscal deficit at Rs 18.2 lakh crore, marginally below the Rs 18.5 lakh crore revised estimate presented in February.

Much of the upside came during the January-March quarter, said Sreejith Balasubramanian, an economist at IDFC Asset Management Company. The March-quarter gross tax collection was higher than that during the same period in recent years, some part of it admittedly due to the manifestation of pent-up demand, he said in a report this week.

The central government’s net tax collections registered a growth of 5% in 2020-21. Higher collections through cess, which doesn’t get shared with states, contributed to the larger increase in net tax collections compared to gross tax collections.

In FY21, devolution to states as a share of taxes fell 8.56% on the year.

Direct tax collections for FY21 were at the lowest since 2017-18 registering a contraction of 13.1%, while indirect tax mop-up saw a growth of 12.6%.

As a result, the proportion of indirect tax collections was higher than direct taxes, indicating an uneven impact of the pandemic on income and consumption.

According to Devendra Kumar Pant, chief economist at India Ratings and Research, the primary reason for this was the windfall gain from excise duty collections and higher goods and services tax collections in the last seven months.

This is only the second time since 2007-08 that indirect taxes have surpassed direct tax collections, shows data from the tax department. In 2016-17 too, indirect taxes had contributed 50.35% to total taxes. 

One of the worst impacted categories was corporate income tax collections, which fell nearly 18% year-on-year. Collection in this category had fallen in the previous fiscal as well on account of the government’s decision to lower the base corporate tax rate.

The reason for direct taxes being lower is weaker corporate tax collections, said Pant. While corporate profitability was better in FY21, the corporate tax cut led to lower direct tax collections, Pant said.

As a result of the sharp drop in corporate tax collection, they were at par with personal income tax inflows for the first time in twenty years, data from the tax department shows. 

The biggest component of the government’s indirect taxes, the goods and services tax, saw an 8.3% drop in collections in 2020-21, reflecting the impact of a weak economy and a nationwide lockdown for a part of the year.

After a sharp fall in the first five months of FY21, GST collections remained above Rs 1 lakh crore for seven consecutive months. They hit a high of Rs 1.41 lakh crore in March. Extension in tax filing deadlines and a recovery in the second half of the year helped push up GST collections.

In FY20, GST collections saw a growth of nearly 3% on the actual collections of the previous fiscal.

Excise duties provided a big buffer for the government in FY21 after it raised the levy on diesel and petrol.

After dropping 10% year-on-year in FY19 and rising 3.7% in FY20, excise collections surged 62.73% in the pandemic year. The government’s additional collections from excise duty alone were able to cushion the fall in GST.

Another outlier in the pandemic year was customs duty collections, which rose 23.3% in FY21 compared to a fall of 7.2% the previous year.

As part of the government’s push for self-reliance or Atmanirbhar Bharat, it has been raising import duties on several items to give impetus to domestic manufacturers.

“When crude oil prices went down sharply, the Government of India increased excise duty on petroleum products and obviously in the last couple of years they have been increasing customs and import duties. So, what you have is significantly higher indirect taxes compared to direct taxes because of the above,” M Govinda Rao, member of the 14th Finance Commission, said.

FY22 Targets Reasonable

Based on the provisional data for FY21, the growth targets in the budget estimates for FY22, imply a moderate growth of 9.6% for revenue receipts and 8.5% for net tax revenues, said Aditi Nayar, chief economist at ICRA.

At present, we do not expect the Government of India’s tax revenues to be meaningfully lower than the budgeted level, Nayar said.

The Reserve Bank of India estimates GDP growth at 10.5% in FY22, although a number of private forecasters have pared their forecasts amid the second wave.

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