Formal sector, administration raises tax kitty 29% in Apr-July from FY20

Year-on-year, the collections grew by 83%. This growth was misleading since it comes on a 30% drop in tax mop-up a year earlier

Tax collection has been one of the few parameters to have grown more than the pre-pandemic level in the first four months of the current financial year.

The Centre’s total tax collections before devolution to the states rose almost 29 per cent in the April-July period of financial year 2021-22 (FY22) over the corresponding period of FY20.  

To be sure, collections grew 83 per cent over the corresponding period in FY21, but this comparison is misleading as it comes on a 30 per cent fall in tax mop-up last year.

Experts attribute the growth over the pre-Covid period to the economic recovery, better performance of the organised sector vis-à-vis the unorganised sector after the Covid outbreak, and improved tax administration and compliance rules. Tax officials credited higher collections to the increasing formalisation of the economy.

Aditi Nayar, chief economist at ICRA, said listed corporate houses have seen a sharp revenue recovery year-on-year (YoY) in the first quarter (Q1) of FY22, which is likely to have supported the revival in direct taxes, amidst a feeble performance of smaller and less formal entities. Madan Sabnavis, chief economist of CARE Ratings, meanwhile attributed the growth to an increase in consumption. “As the economy picks up with lockdowns being relaxed or lifted, there will be more goods and services purchased. This is in no way reflective of the health of sectors or any segment,” he said.

Sabnavis said corporate profits have risen because of the base effect and there have been fewer job losses this time, which is leading to an increase in income tax collections.

The buoyancy in collections, said Rakesh Nangia of Nangia Andersen, suggests a recovery in industrial and construction activity, flourishing exports, and services sector growth.

“The uptick in economic activity and increased consumer spending pushed India back on the growth trajectory. There has been a massive inflow of funds in the capital market by all classes of investors, resulting in the jump in collection of securities transaction tax (STT),” he said.

STT yielded over 60 per cent higher revenues to the exchequer in the first five months of FY22 YoY.

Enforcement

Most experts attributed growth in indirect tax collections to better enforcement by the government.

Rajat Mohan, senior partner AMRG Associates, said factors pent-up demand for consumer products, increased formalisation of the economy, faster recoveries by the tax department, and a multi-fold increase in commodity prices have contributed to the rise.

M S Mani, partner at Deloitte India said the increasing focus on detecting evasion using data analytics has significantly contributed to robust goods and services tax (GST) collections in recent months.

Sabnavis said when sectors open up, people spend and GST rises. He, however, said states are still being compensated, which implies that collections are not normal.

Pratik Jain, partner at PwC, said the high GST and Customs collections clearly indicate that the economy is on an upswing and demand is picking up.

“High GST and Customs collections clearly indicate that the economy is on an upswing and demand is picking up. The tax base has expanded in the wake of increased use of technology and tightening of tax administration. Industry as well as consumers have adapted quickly to the challenges posed by the pandemic,” Jain added.

Last September, the government brought in Aadhaar-based GST registration to check fraud. Besides, through data sharing of income tax, customs and GST, the government is able to track mismatches through analytics using artificial intelligence. A government official pointed out that they can now draw an entire network diagram if any fake bill has been generated by non-existent or fake dealers.

In addition to this, the phased introduction of e-invoicing – which was made mandatory for entities with over Rs 50 crore turnover from April 1 – has also plugged loopholes. As the input tax credit and output tax details are readily available, it has become easier for tax officials to track fake input credit.

As for Customs, Mani pointed out that while the recent increases in IGST collections on imports could be attributed to the surge in inward shipments, the chip and container shortages could impact future collections.

Excise collections

Nayar said growth in excise collections benefited from the hike in rates last year and the recovery in mobility after the ebbing of the second wave.

Notably, collections from excise duty and Customs rose even in FY21, despite the lockdowns and a massive 24 per cent contraction in the gross domestic product (GDP). While Customs duty saw a mere 0.24 per cent increase over the previous year, excise duty made government coffers richer by 24 per cent. 

That was largely thanks to increases in excise duty on petroleum products. For instance, excise duty on petrol was hiked from Rs 19.98 per litre to Rs 32.9 last year.

Nayar said Customs duty collections are being powered by the surge in gold imports, which surged to $4.2 billion in July from $1.78 billion a year ago.