Rising economic activities lead to surge in personal income tax in H1FY24

Corporation tax grows moderately, growth in GST collections decelerates but the new normal is above Rs 1.55 trillion a month now

Personal income tax collections have been robust till October nine of the first half of the current financial year, reflecting increasing economic activities and better compliance. However, corporation tax mop-up rose moderately.

Growth in the goods and service tax (GST) collections also decelerated in the first half of the current financial year compared to that in the corresponding period of the previous financial year, even as the new normal is above Rs 1.55 trillion a month now.

For instance, direct tax receipts grew about 22 per cent at Rs 9.57 trillion till October 9 of the current financial year. The growth is higher than 16 per cent at Rs 7.45 trillion witnessed during the corresponding period of the previous financial year.

However, the collections constituted 52.50 per cent of the Budget Estimates this time, which was only fractionally higher than 52.45 per cent last time.

This time, there is a huge jump in personal income tax collections while there is a deceleration in the growth of corporation tax revenues.

Mop up from personal income tax was up 32.51 per cent during April-October 9 of FY24 against 17.35 per cent during the corresponding period of the previous financial year.

However, receipts from corporation tax rose 12.39 per cent this time, which was lower than 16.29 per cent last time.

This seems a bit perplexing as the economic activities are gaining momentum now, as reflected in personal income tax. According to a Bloomberg report, net profit of the top 200 companies of the country is likely to hit Rs 2.4 trillion during the second quarter of the current financial year, which is an increase of 44.5 percent from the same period last year.

Central Board of Direct Taxes (CBDT) Chairman Nitin Gupta recently said the growth rate in corporate collection would not pick up, attributing the slowdown to the concessional corporate tax regime. He said it would continue to grow at a "moderate" rate.

Introduced in FY20, companies can pay income tax at 22 per cent, subject to the condition that they will not avail of any exemption/incentives. For new manufacturing units, the tax rate was reduced to 15 per cent.

The CBDT chief had said when companies' tax rates were reduced to 22 per cent and 15 per cent as against 30 per cent, it will grow at a moderate rate only.

He had said that around 60 per cent of corporate profit shifted to the new concessional regime last year. That was reflected in the FY23 corporate tax collection as well, he explained when asked about why the growth in corporate tax had not picked up on the expected lines under the concessional tax regime.

Regarding indirect taxes, GST receipts rose 11 per cent at Rs 9.93 trillion in the first half of the current financial year. Though the growth may look high, it was lower than 32.19 per cent at Rs 8.9 trillion witnessed during the corresponding period of the previous financial year.

The average monthly GST collections stood at Rs 1.65 trillion during the first half of the current financial year, which was 11 per cent higher than Rs 1.49 trillion during the corresponding period of the previous financial year. None of the months in the first half of the current financial year delivered less than Rs 1.57 trillion.

The new indirect tax regime has come a long way to witness Rs 1.65 trillion in average monthly collections, which looked very difficult just a few years back.

Bank of Baroda chief economist Madan Sabnavis says the buoyancy of tax collections is definitely due to the continued move to normalcy in the economy.

"This coupled with better administration, has led to higher direct tax collections. Corporation profits have been higher in Q1 and probably Q2 with raw material costs being stable this year," he points out.

The GST collections have received a boost also due to higher inflation, which has pushed up the value of consumption, he points out.

"We can expect this to be maintained this year," he says.

Amit Maheshwari, partner at tax and consulting firm AKM Global, believes that increase in direct tax collections can indicate several factors and may not necessarily be attributed solely to the state of the economy or tighter administration.

Those factors can be in the form of several government initiatives taken for increasing the tax base, increase in the income levels, increased awareness among the taxpayers and specific events in the past, he said.

Such initiatives include demonetisation, which has increased tax compliances and the tendency to pay the due taxes over the years, he points out.

The other dimension is improvement of the job market, robust real estate and financial markets, he believes.

For instance, provisional figures reveal that the Centre has collected approximately Rs 14,000 crore from securities transaction tax (STT) in the first half of this fiscal year. This amount exceeds half the full-year target of Rs 27,625 crore set for FY24.

Maheshwari says another important aspect which has contributed to increased tax collections is the more targeted approach towards tax assessments adopted by the tax department and the robust use of technology and data analytics by it.

Saurabh Agarwal, tax partner at EY, says the increased GST collections are attributable to multiple factors such as an increase in taxable base, increased administration and the rising economic activities in the country.

Maheshwari attributes this to the robust economic activity.

India's economy grew to a four-quarter high of 7.8 per cent during the first three months of the current financial year. However, the nominal GDP growth was just eight per cent during the quarter.

Data that came after that, such as tax collections one cited above, purchasing managers' indices, the index of industrial production, show that the economy would perform well in the second quarter too. Besides, inflation has risen in the second quarter compared to the first, which meant that nominal GDP growth would not be as low as the first quarter. This meant a greater push-up for tax collections.

Maheshwari says stringent measures against indirect tax evasion and fake GST registration drives have helped transition from an informal economy to a formal economy.

Gupta had emphasised that steady growth in direct tax receipts in the current fiscal is due to multiple factors, including the efficient use of technology and sharing information about the taxpayers' transactions in the annual information statement, aiding the overall growth and addition of new filers.

A total of 73.3 million ITRs were filed, out of which 72.1 million were verified by taxpayers as of October 15, 2023-24 assessment year. End