A look into the reasons for the strong personal income tax collection in Q1

In a quarter affected by the second wave, India saw record personal income tax collection at nearly twice that collected in Q1FY21, and 26% more than Q1FY20

Tax collection by the central government in the April-June quarter (Q1) of the current financial year came in at a record high. Gross tax collection stood at Rs 5.36 trillion, and it could well be at the level of 11 per cent of gross domestic product, if we assume that nominal GDP grew by 24 per cent in Q1. This is the highest ever. 

Tax revenue from all sources grew strongly in Q1, according to finance ministry’s provisional accounts. While growth in excise duties can be attributed to retention in high fuel taxes in times of growing demand, good corporate tax collections are due to record rise in corporate profits.

But what explains strong growth in personal income tax (PIT) collections? PIT revenue in April-June, post refunds, was nearly twice that collected in Q1FY21 (a year ago), and 26 per cent more than Q1FY20. 

A general sense that we get from how economic recovery is happening, is that employees’ salaries are not growing strongly. Rather, in the last financial year FY21, many employees faced salary cuts. 

But recent data shows that employee expenses by listed companies grew by 14.7 per cent in Q1 (for a sample of close to 3,000 companies). Such growth was witnessed only in Q4 of 2017-18, exactly a year after demonetisation. 

But more importantly, companies spent 15.4 per cent of their total expenditure on employees. The employee expense to total expenditure ratio peaked in Q1 of FY21, when there was a nationwide lockdown, when it was 18.8 per cent. But a ratio as high as 15.4 per cent when the economy is poised to recover is considerably higher than the four-year average of 13-13.5 per cent. 

Employees getting a higher share of companies’ spending from when the pandemic began could be one reason for higher income tax collection in Q1. 

Another factor could be the rising share of tax deducted at source in gross tax collection. The share of TDS in direct tax collection has grown from 32.8 per cent in 2010-11 to 37.5 per cent in 2018-19, according to Income Tax Department data. 

It is likely that this share has risen in the most recent years too. 

But experts cite a few other reasons, which could have potentially given a boost to income tax collections in a quarter when economic recovery was looking fragile due to the intensity of the second wave. 

The first reason could be related to high savings by individuals in the previous year. Covid-19 pandemic forced people to stay at home and severely curtailed their spending. This resulted in higher savings, and inflow to all savings instruments shot up. 

This included savings bank accounts, term/fixed deposits, small savings and public provident funds, National Pension System among others. 

But savings also went to mutual funds and the stock market. And the market, after falling to a multi-year low in April 2020, has sprung back to record levels today. BSE Sensex lost nearly 34 per cent from January 2020 to March 2020, but has gained 100 per cent from the low to date. 

Stock market investors made a bounty in this period, and it is the capital gains tax on these that could have added to the personal income tax collected in Q1. 

“Part of the reason for growth in personal income tax could be from self declaration of capital gains from stock market investments. In addition, interest on bank deposits also attracts TDS, and deposits were strong in 2020-21,” said Rohinton Sidhwa, partner at Deloitte. 

The second reason could be the tendency of companies to retain the existing talent pool by offering perks and salary hikes. 

“There is a visibly high demand for retaining talent as companies are assured of growth in coming years, and good talent is hard to get,” said Chaitali Mukherjee, Leader at PwC India. 

As an earlier Business Standard article showed, listed companies benefited while smaller companies lost out in FY21. It is likely that bigger companies retained employees by hiking their salaries at the first sign of revival. 

Finally, the changes in tax filing/payment calendar last year, and the relaxations given to individual taxpayers to make up for the delays in filing taxes could also have made a difference. 

“The improved efficiency in tax collection coupled with leeway given in tax filing to account for lockdowns, in the form of extension in due dates could have resulted in smaller collections in the early quarters into the pandemic and higher collections as recovery begins,” Anubhav Gupta, Partner at Deloitte.