Looking at 2022-23. In terms of tax buoyancy, an indicator of how responsive tax growth is to the speed of the economy, the PIT is much better than the corporate income tax (CIT). If we look at the net income of CIT in the last financial year (totaling Rs 825,834 crore), the float is just 1, while for the case of PIT (808,221 Rs), the float is 1.2. tax floating equal to 1 means that the rate of tax collection is equal to the growth rate of nominal gross domestic product (GDP). Greater than 1 means tax revenue is growing faster than the economy, while any value less than 1 indicates a slower rate of tax revenue growth than economic growth.
In terms of corporate tax buoyancy over the past decade, it has repeatedly slipped below 1 — for example, for six consecutive years from fiscal year 12 to fiscal year 17. It has risen in the following two years only to fall again in 2019-2020, this time in the negative zone (-2.5). An analysis by Ernst & Young (EY) said: “In 2020, the reduced CIT floating rate could be due to the combined effects of the economic downturn and the CIT rate cuts.” The analysis looks at net revenue, i.e. tax after refund.
The PIT floating rate, too, has sometimes fallen below the threshold, such as in 2015 and 2016, but has remained above 1 for many years, including in the last two years, indicating strong tax collection from individuals.
Why is India’s corporate tax recovery not keeping up with the pace of personal income tax collection? Should corporate tax’s share of GDP, at 3% in fiscal year 23, be considered satisfactory when it has reached much higher levels in previous years (between 3.2-3.9% in the period 2011-2019)? The tax experts and income tax analysts ET spoke to all agreed that CIT collection appears slow and sluggish because the PIT cleanup is unusual for a variety of reasons, including the effectiveness of digital tools, better compliance and strong wages in some service sectors. They also said that the corporate tax rate was reduced from 30% to 25% in 2019 and the 15% reduction for new manufacturing companies is not adjusted in the near future, as it will be interpreted as instability. in Indian tax policy. . In addition, they argue, the corporate tax reduction is still satisfactory and has not yet fallen into the red zone.
Vikas Vasal, tax partner of Grant Thornton Bharat, lists several reasons behind the high PIT collection even after the Covid-19 outbreak. “Wage growth in sectors, especially the high-paying service sector, increased formalization of the economy and creation of more jobs in the post-Covid organized sector, all,” he said. all contribute to high personal tax collection. He also emphasized other factors such as comparing information from many sources such as annual information disclosure, tax deduction at source (TDS) for individuals buying and selling properties, better TDS Payroll compliance through awareness raising and enforcement and a new, simplified tax regime.
Another tax expert, Sudhir Kapadia, argues that CIT compliance is consistently high. Kapadia, EY’s partner, tax and regulatory services, said: “However, due to a number of tax digitization transformation measures taken by the government, PIT compliance has also improved. significantly. He added that the current CIT increase is satisfactory.
WHAT IS NEXT?
Will the current upward trend in CIT and PIT continue in the near term or will the graphs behave differently? “CIT growth will continue at 14-15%,” said Rohinton Sidhwa of Deloitte India. PIT will show better gains simply due to better compliance and more taxpayers.”
Currently, the majority of CIT comes from a few large corporations. According to the ETIG database, out of 4,600 listed companies, 22 contribute 50% of taxes in 2023. During the year, the top 10 taxpayers, in descending order, are Dependent industry, State Bank of India, HDFC Bank, Tata consulting service, ICICI Bank, Electricity Finance Corporation, Bajaj Finserv, Indian coal, Vedanta And Tata Steel. In fiscal year 22, a year hit by the second deadly pandemic wave, 21 companies paid taxes of Rs 5,000 crore or more, accounting for 46.5% of the total tax paid by listed entities. .
As of June 17 of the current fiscal year, when data is available, total direct tax revenue (before adjustment for tax refund) has recorded a growth of 12.7% year-on-year. Total corporate tax collected for the period – Rs 187,311 crore – was down 1.7% year-on-year. Direct taxes include collection of CIT, PIT and securities transaction tax (STT) while indirect tax mainly consists of goods and services tax (GST).
Deloitte’s Sidhwa said Q1 growth in pre-tax, at 13.7%, was an early indicator of what looks likely to continue to grow in the current financial year. Citing a recent report by the congressional standing committee on finance, EY’s Kapadia said TDS, tax collection at source (TCS) and advance tax accounted for 90% of tax revenue. “With the increasing speed and scale of digitization in tax administration along with the tax authorities’ use of intelligent data analytics, it is expected that both PIT and CIT revenues will continue to grow,” he said. good growth.
“Given the increasing speed and scale of digitization in tax administration along with the tax authorities’ use of intelligent data analytics, it is expected that both PIT and CIT revenues will continue to grow well. “
R Prasad, former Chairman of the Central Council of Direct Taxes (CBDT), said that the government reduced corporate taxes in 2019 mainly to have tax rates on par with some of India’s competitors in the Southeast Asia, such as Vietnam and Indonesia, and with the expectation that the extra cash will be deployed in new business ventures, thus creating more jobs.
“Unfortunately, private investment remains dismal post-pandemic despite corporate tax rate cuts in 2019. In terms of PIT, the salaried class continues to be the most taxed group, ” he added.
The 15% corporate tax rate for start-up manufacturing companies is one of the lowest in the world.
For Vikram Doshi, a partner at Price Waterhouse & Co, this is a government statement that they are serious about attracting investment in the manufacturing sector. It is unlikely that the government will change the corporate tax rate in the near future.
“Unfortunately, private investment remains dismal post-pandemic despite corporate tax rate cuts in 2019. In terms of PIT, the salaried class continues to be the most taxed group.”
However, the voices demanding more taxes from high-margin companies will only get louder if the big boys keep their expansion plans and keep cash on hand. The policy was criticized during the height of the pandemic when tax collection fell. The problem emerges whenever there are reports of dismal private investments despite the healthy balance sheets of corporations. However, the government has made it clear that corporate tax policy, for now, will continue as it is.
In this scenario, what is the outlook for tax collection in the coming years?
Grant Thornton’s Vasal earned three points. First, with an increase in GDP, tax collection is bound to increase by the same proportion. Second, with increasing formalization of the economy, the total tax revenue will increase rapidly. Third, the number of measures governments take to gather information and use data analytics to identify warning signs are both yielding results and will help improve the tax-to-GDP ratio in the coming years. next year.
With input from Shailesh Kadam