Don’t miss the latest developments in business and finance.

Slowdown blues: Direct tax mop-up growth slumps to 3.5% till mid-October

A combination of factors is responsible. This includes a deepening of the general economic slowdown and corporation tax cuts

tax, taxpayers, GST
Dilasha Seth
3 min read Last Updated : Oct 25 2019 | 12:34 AM IST
The government might be impelled to steeply cut its direct tax collection target, with growth in this regard slumping to 3.5 per cent up to mid-October from the same period in the earlier financial year, as against the Budget target of 17.3 per cent. The year formally began on April 1.

A combination of factors is responsible. This includes a deepening of the general economic slowdown and corporation tax cuts. Collection will have to rise by 30 per cent in the remaining period of the financial year to achieve the Budget estimate. 

Last months's rise in direct tax collection was five per cent. In the first six and a half months, corporation tax revenue grew by only 2.5 per cent.

“The growth target was unrealistic to begin with, looking at the economic activity slump. The corporation tax rate cut will further impact collection. The numbers will likely see a steep downward revision in the upcoming Budget for the next fiscal,” said a government official.

To arrest corporate slowdown, finance minister Nirmala Sitharaman had announced steep cuts last month in corporation tax, with retrospective effect from April 1. The rate was cut from 30 per cent to 22 per cent for existing companies that do not enjoy any exemptions. And, to 15 per cent from the earlier 25 per cent for new manufacturing companies. With surcharge and cess, the effective rate for existing companies has come down to 25.17 per cent, from 35 per cent.

According to an earlier report in this publication, combined tax outgo for the September quarter was down 3.1 per cent year-on-year. As a result, the average effective rate of tax for the sample of 200 firms declined to 22.9 per cent during the quarter, as against 28.5 per cent in the year-ago one. The tax cut boosted post-tax earnings by Rs 3,900 crore, equivalent to 5.6 per cent of their pre-tax profit of the September 2019 quarter.

This means lower collection for the government in the immediate term. The hope is that the rate cuts would  revive corporate sector growth, resulting in higher tax collection. “That will be somewhere in the medium term,” said the official.

Last week, revenue secretary A B Pandey told Business Standard the government would consider revising the steep collection target. "We will consider that next month, when the Budget making exercise (for 2021-22) will start. At that time, we will take stock of revenue collection and projection for next year and  come up with revised estimates."

Overall advance tax collection, including corporate and personal income, grew six per cent between April and September, the first six months of 2019-20, as against 18 per cent in the year-ago period, according to sources. Collection after the second instalment stood at Rs 2.2 trillion. Within the collection, corporation tax mop-up grew 6.5 per cent and personal income tax by 3.5 per cent.

Advance tax growth thus far in 2019-20 is the lowest in at least four years. The growth rate was 18 per cent in 2018-19, 11 per cent in 2017-18 and 14 per cent in 2016-17 in the same period.

About 45 per cent of direct tax revenue collection comes from advance tax, 35 per cent from Tax Deduction at Source, 10 per cent from self-assessment and 10 per cent from recovery.

Topics :Corporation TaxDirect taxdirect tax collectionsDirect taxesdirect tax data

Next Story