Corporate tax this fiscal likely to exceed Budget Estimates by 19%

Direct, indirect tax revenues have been a bright spot for Centre in FY22

After two years of shortfall, corporate tax collections in 2021-22 (FY22) are set to cross budgeted targets by quite a margin. The Revised Estimates (RE) for corporation tax in the current fiscal year could be around Rs 6.5 trillion, Business Standard has learnt. This is nearly a 19 per cent jump over the Budget Estimates (BE) of Rs 5.47 trillion.

Direct and indirect tax revenues have been a bright spot for the central government this year, a reflection of strong economic revival in spite of two waves of the Covid-19 pandemic, one of which is still under way.

This is welcome news for finance ministry officials, who have seen expenditure commitments rise substantially. In the recent winter session of Parliament, the Centre sought approval for Rs 3-trillion additional expenditure.

“Gross corporate tax collections had already crossed the BE figures in December. A clear sign that the initiatives taken by the government to revive the economy and support various sectors have been effective whilst also reflecting corporate earnings recovery,” said a senior government official.

According to the information on adva­nce tax released by the Central Board of Direct Taxes on December 17, 2021, gross corporate tax collections stood at Rs 6.06 trillion.

Corporate earnings have been on a firmer footing this year, partly due to a low-base effect from lockdown-affected 2020-21 (FY21). The combined net profit of Nifty50 companies in July-September (second quarter, or Q2) of FY22 quarter reached an all-time high of Rs 1.54 trillion.

According to brokerage estimates, the Nifty50 companies' combined net profit is expected to rise 25 per cent year-on-year (YoY) in the October-December quarter (third quarter, or Q3) of FY22 to Rs 1.5 trillion.

In comparison, the index companies are expected to report combined net sales — net interest income in case of banks and lenders — of Rs 12.67 trillion in Q3, up 22.6 per cent YoY, and Rs 11.63 trillion in Q2FY22. The growth in earnings will be almost entirely led by companies in the cyclical sectors — banking, financial services and insurance, metal and mining, and oil and gas — while the rest of the index companies (non-cyclicals) are expected to see a dip in earnings due to margin contraction.

Moreover, the FY21 corporate tax RE fell short of that year’s BE by 34.5 per cent. Before that, in 2019-20, corporate tax collections came in 27 per cent lower than BE. The last time collections exceeded the Budget target was in 2018-19.

Not all of this shortfall was because of economic slowdown. In September 2019, Finance Minister Nirmala Sitharaman had announced new corporate tax rates, as the base rate was reduced to 22 per cent, from 30 per cent, for corporates foregoing various exemptions. The rate for new manufacturing companies was reduced to 15 per cent, from 25 per cent.