Direct taxes likely to be top earner

Trends show indirect tax mop-up to lag this fiscal.

For the first time ever, direct tax collections may surpass indirect tax collections this fiscal, aligning India with global tax systems and fulfilling an important policy target of Finance Minister P Chidambaram.

The revenue department says trends in collections (personal income tax and corporation tax) in the first two months of this financial year and average growth in recent years suggest that direct tax collections may touch Rs 3,00,000 crore.

That means more than 12 per cent growth over the government's estimate of Rs 2,67,490 crore for 2007-08.

Collections of indirect taxes (Customs, excise and service tax), which have traditionally dominated India's tax revenues, are projected at Rs 2,79,190 crore for the fiscal.

Direct tax collections rose 39 per cent in 2006-07, while indirect tax collections rose 21 per cent. During the last four years, average direct tax collections rose 29 per cent, compared with 17 per cent growth in indirect tax collections.

This indicates that direct taxes will be key to government finances. Policy makers, including Chidambaram, have frequently described these taxes as "progressive taxes of the future."

"Given that income tax collections are on an upward momentum, collections will be higher than the average growth in recent years," said a finance ministry official.

Net direct tax collections grew 71 per cent to Rs 13,335 crore in the first two months (April, May) of this fiscal against Rs 7,779 crore in the same period last fiscal. This was mainly because of a lower level of refunds and an advance in the assessment deadline to December.

Earlier, the assessment of previous years used to be completed by March, leading to spillover of demands and claims to March and April.

"Last year, the gross collections were higher due to the spillover demands. But this year, there is no such issue," the official said. In fact, the savings on refund are as high as Rs 5,800 crore in April-May over last year.