Deficit In Direct Tax Collection - Is Government Being Too Optimistic?
Looking at the revenue sacrifice on account of a reduction in corporate tax rate and the sluggish economy, it is going to be tall order for the income tax department to bridge this gap.
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Every year, the government estimates direct tax collection on the basis of revenue collection of earlier years, growth in earlier years’ taxes, changes in budget which impacts tax collection, GDP growth etc. Based on the estimated tax collections, the government balances its budget and comes out with a fiscal deficit. It is common knowledge that an increase in tax collection is, to a great extent, attributable to growth in GDP and higher compliance by taxpayers.
History of Direct tax revenue and GDP of the last 5 years is as under:
Net Collection of Direct Taxes
GDP Current Market Price
Direct Tax GDP Ratio
GDP Growth Rate
Tax Growth Rate
*Includes Rs 14,861 crores tax collection under Income Disclosure Scheme, 2016.
For the fiscal year 2018-19, direct tax collection was estimated at Rs. 11,50,000 crores which were subsequently revised to Rs. 12,00,000 crores (Actuals- 11,17,416 crores). However, the direct tax collection for the current fiscal year (i.e. 2019-20) was estimated to be Rs. 13,35,000 crores which were 11.25% higher than the revised estimate of last year.
Against the target of 13,35,000/-, the government could achieve a collection of Rs. 5,50,000 Crores till 2nd week of September (net tax collection stood at Rs. 4,50,000 Crores) and Approx. Rs. 6,70,000 Crores till November month.
Subsequent to setting collection target in the Budget, Government through an ordinance, has reduced tax rate for corporate and also given exemptions to a certain investor from increased surcharge rates on capital gain tax. The loss on account of these changes was estimated at Rs. 1,45,000 crores.
Even though there was a loss on account of reduction in the tax rate, however, Finance Ministry through a video conference on Dec. 16, exhorted their officials to meet the direct tax mop-up target of Rs 13,35,000. Collection in the eight months to November grew at 5% from a year earlier, against the desired 17%.
Replying to a debate on Taxation Law Amendment Bill, 2019 in the Lok Sabha, Finance Minister Nirmala Sitharaman categorically said that there is no decrease in indirect tax collection. Historically, maximum collection of direct taxes happens in the last quarter of the fiscal, she added.
Considering that the assessments for AY 2017-18/ (A.Y 2016 for transfer pricing cases) and old reopened cases have become time-barred on 31st December 2019, the demands raised as per the assessment orders and pending last quarter of paying advance tax, the collections are expected to grow significantly in the quarter January to March 2020. But the reduction in corporate tax rate may result in a huge shortfall in advance tax for the last quarter. Hence, the government may not achieve the budgeted target.
Considering that there may be a shortfall in the actual collection, the Tax department may opt for coercive action for recovering the outstanding demand and sometime may also threaten the taxpayer for prosecution on account of non-payment of taxes.
Looking at the revenue sacrifice on account of a reduction in corporate tax rate and the sluggish economy, it is going to be tall order for the income tax department to bridge this gap. It has to be wished that the tax department does not resort to tax terrorism as such a move will harm the economy in the long term.
Buoyancy of Income-tax
As per the RBI circular dated 12.09.2019, buoyancy of personal income tax was budgeted higher at 1.86 in 2019- 20 than the realised buoyancy of 1.17 in 2018-19 (based on provisional accounts). For 2019-20, corporation tax buoyancy is budgeted at 1.40, which is lower than that realised in 2018-19 (PA), albeit higher than the long-term average. A tax is said to be buoyant if the tax revenues increase more than proportionately in response to a rise in national income or output.
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