Covid-19 impact: TDS revenue collection in first 10 days of May down 22%

The fall over the previous year indicates large layoffs, salary cuts, stagnant rental activity due to nationwide lockdown

Revenue collection from tax deducted at source (TDS) fell 22 per cent from May 1 to May 10, the last day for TDS payment.

This indicates large layoffs and salary cuts in April, besides stagnant rental activity due to the coronavirus (Covid-19) lockdown.

TDS collections stood at around Rs 44,110 crore between May 1 and May 10, against Rs 56,447 crore mopped up in the same period last year. In fact, gross direct tax collections from April 1 to May 10 this fiscal year were down 14.6 per cent at Rs 85,665 crore against Rs 1 trillion in the corresponding period of last year. Collections in the first 10 days of the month are essentially TDS deposits.

Economic activity came to a standstill and business optimism fell to historic lows with the lockdown extended thrice since March 24.

Services purchasing managers’ index by Markit fell to 5.4 in April from March’s 49.3. This is a historic low since the survey first began over 14 years ago.

Although Prime Minister Narendra Modi urged industry not to lay off employees, data suggests that many did. Payment of TDS needs to be done when it is due, even if the salary is deferred.

“Data indicates that there may have been many layoffs or salary cuts. Although some may have deferred salaries but TDS becomes payable when salary becomes due. Therefore, many prefer to lay off employees. Besides, many have ended contracts or not renewed them,” said a government official. He added that rental payments were also deferred, which contributed to the dismal collections.

The government used TDS as a means to collect tax in order to minimise evasion by taxing income at the time it is generated rather than at a later date.

TDS is applicable to various incomes such as salaries, interest received, commission received, cash withdrawals over Rs 1 crore and rent payment exceeding Rs 50,000 a month, among others. The government, in April, also allowed employers to deduct TDS as per the new optional tax regime at the time of paying salaries from the beginning of the fiscal year.

This is against the earlier stance that the option can only be availed at the time of filing income tax returns (ITR). This would leave some extra cash with individuals every month, lowering the TDS burden.

The Budget introduced an alternative taxation regime for individuals, allowing an option for lower tax rates, provided they don’t avail certain exemptions/deductions.

Some exemptions/deductions are house rent allowance, interest on home loan and investments made under Section 80C, 80D, 80CCD, among others.

Direct tax collections surged 36.5 per cent to Rs 34,784 crore in the first month of fiscal year 2020-21 despite the nationwide lockdown, thanks to a 63 per cent year-on-year (YoY) fall in tax refunds in April.

Without accounting for refunds, the collection contracted 5.4 per cent. Gross direct tax collection stood at Rs 41,556 crore in April, as against Rs 43,950 crore in the corresponding period last year.

Refunds of Rs 6,772 crore were about a third of the amount disbursed in the same month last year, at Rs 18,474 crore. This boosted net collection.

Direct tax collections missed the downward revised target for 2019-20 by Rs 1.42 trillion, settling at Rs 10.27 trillion, a 9.5 per cent fall over the previous year. A growth rate of 28.2 per cent will be needed against the assumed rate of 12 per cent in the
Budget to meet the collection target of Rs 13.19 trillion for the entire fiscal year.

With earnings of most companies hit due to the lockdown, the February revenue collection target announced in the Budget no longer holds. Hence, income tax officers have urged for a revision in the Budget estimates.

FY21 revenue projections were based on an assumed nominal GDP growth of 10 per cent, which means a tax buoyancy of 1.2. The Economic Survey pegged FY21 real GDP growth at 6-6.5%, which is far from reality now.