Tax Revenue Performance Perhaps Reflects The Nature Of Recovery

By Malini Chakravarty

All available indicators point to the fact that the Centre’s tax collection is set to exceed last year’s Budget Estimates (BE). The gross tax revenue collections in the first eight months of the current financial year (FY) stood at Rs 15.4 lakh crore, implying that nearly 70 per cent of the Rs 22.1 lakh crore target, had already been reached. Experts opine that the growth in central government’s tax collection for the entire year could be as high as 35 per cent compared to the previous year.

The disaggregated data released by the Controller General of Accounts (CGA) shows that this better-than-projected performance in tax collection has been driven by impressive increases in both direct and indirect tax receipts. Thus while corporation tax increased by more than 90 per cent in the first eight months, customs duty almost doubled during this period compared to the corresponding period of the previous year. Given that tax collection usually picks up in the fourth quarter of a financial year, the trend witnessed so far suggests that collection for the whole year is likely to exceed the budgeted target by a significant margin. For instance, as per a Business Standard report of January 21, 2022, in the case of corporation tax, the Revised Estimates (RE) in the current fiscal year could be around Rs 6.5 lakh crore. If that is indeed so, then corporation tax collection would exceed the Rs 5.47 lakh crore BE by more than Rs 1 lakh crore.

Contrasting picture to the Covid-affected 2020-21

This is in contrast to the situation witnessed in the covid-affected year of 2020-21 when almost all sources of tax revenue collapsed. This was of course to be expected given the lockdown imposed in mid-2020 would have necessarily had adverse impacts on economic activity. The decline in economic activity obviously led to a sharp decline in revenues for the government. As the figure below shows, corporation tax collection (Actual) saw the sharpest fall in 2020-21 (followed by income tax and Goods and Services Tax (GST)), compared to the BE projections of 2020-21.

One of the reasons that excise duty collection, i.e. tax on fuel (petrol and diesel), bucked the trend of reduced collection witnessed in other taxes, is because of the policy measure to increase tax rates on fuel in March and May 2020. This also meant that in FY 2020-21, the contribution of excise duty on fuel products alone was nearly as high as that of corporation tax in total tax collection.

Turnaround in tax collection and the nature of economic recovery

In light of this background, the turnaround not just in total tax collection but also in direct tax collection this year should be a cause for cheer. But perhaps not everything is as positive as it might seem on first sight. One reason for that is while the quantum jump in excise duty collection last year was policy driven (due to hike in excise duty rates), the increase in direct tax collection this fiscal is not because of any policy change. Instead, it perhaps reflects the nature of recovery the Indian economy is witnessing.

As several reports show, India’s corporate sector is enjoying a dramatic turnaround with it set to witness a surge in profits this year. In fact analysis based on the Reserve Bank of India’s (RBI’s) studies of corporate finances, points out that profits for the full year of the RBI’s sample of companies could well be double the level of 2018-19 – the year that had seen record corporate tax collection of Rs 6.64 lakh crore. At the other end of the spectrum, thousands of micro, small businesses are staring at closure or scaling down their businesses on account of, among other things, lack of enough customers. This is an indication of income concentration with large companies taking over market shares of the smaller companies that are closing down. Since large companies also pay more direct taxes, the surge in their profits would explain a large part of the impressive increase in corporation tax collection.

This kind of income concentration is also perhaps driving increase in income tax collection. Sales of passengers cars and two-wheelers provide a good proxy of earnings of and demand emanating from different segments of the population. As some analysts have pointed out domestic two-wheeler sales from April to December 2021 are at a decadal low (and this is so despite very low interest rates). The falling domestic-two wheeler sales perhaps points to the fact of the lower end of the middle class is uncertain about their earnings. Sales of passenger vehicles, which are typically bought by India’s well-to-do, on the other hand, have bounced back to the pre-pandemic levels. Further, this has been driven by sales of relatively more expensive multi-utility vehicles (MUVs), whereas sales of non-MUVs have remained flat from April to December 2021 compared to the same period in 2020. Data also shows that while the demand for expensive real estate has picked up post covid, that for cheaper real estate has not. Clearly, the economic recovery so far has meant divergent situations for different sections of the population.

These trends are further buttressed by the fact that direct tax collection has shown fairly impressive growth despite a drop in the number of taxpayers filing returns this year by about six lakhs compared to last year.

In fact, as some analysts have noted, this kind of recovery, which is limited to certain segments of the economy, and the attendant increase in conspicuous consumption by the rich could also be one of the reasons that GST collection has performed better over the last few months.

Need for a broad-based economic recovery

In all, the impressive increase in tax collection is a positive development as it provides fiscal space to increase public spending in the upcoming Union Budget 2022-23. The question however, is whether this can be sustained over a longer period without domestic demand picking up significantly. That in turn would require economic recovery to be more broad-based. For that to happen, it is essential that the government increases substantially spending for generating employment in the country and for provisioning of social sector services that the poor depend on. While this may increase the fiscal deficit, but as former governor of RBI has said, “expenditure required in order to meet the needs of those from the vulnerable groups impacted by the pandemic”, needs to be one of the priorities in the forthcoming Union Budget.

Malini Chakravarty is Thematic Lead - Tax Equity at Centre for Budget and Governance Accountability (CBGA). Malini has worked extensively on issues of domestic taxation and their inequalising impact, such as that of the Goods and Services Tax (GST) introduced in India in 2017.