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The Central Board of Direct Taxes has announced that net direct tax collection has exceeded its target for 2023-24. It has increased 17.7 per cent over last year and much faster than the income increase of about 9 per cent. Analysis of this data is also important since the Prime Minister has set in motion the issue of redistribution in the economy.
Net direct tax collections of the Centre, at ₹19.58-lakh crore, are higher than the Budget estimate of ₹18.23-lakh crore for 2023-24. This was revised to ₹19.45-lakh crore in the Interim Budget 2024-25 and the actual has turned out to be even higher by 0.67 per cent. The net figure is arrived at by subtracting the refunds to taxpayers. The refunds have also increased substantially by 22.74 per cent over the last year’s figure of ₹3.09-lakh crore to reach ₹3.79-lakh crore. What does it tell us about Indian economy’s performance in 2023-24?
Rising share of PIT
Direct tax collection by the Central government comes from incomes, wealth and transactions. Tax on wealth — wealth tax, estate duty and gift tax — has been negligible since it is largely eliminated. Income tax is collected both as personal income tax (PIT) and corporation tax.
PIT has sharply increased by 24.26 per cent. Corporation tax has increased by 10.26 per cent and is 46.53 per cent of the total direct tax collection, considerably less than its share of 49.64 per cent in 2022-23.
In 2018-19, revenue from corporation tax exceeded PIT by 40.3 per cent. In 2019-20 this excess declined to 13.05 per cent due to the sharp reduction in the corporation tax rate. In 2020-21, the excess turned into a deficit of 6.4 per cent but in 2021-22 corporation tax collection again exceeded that from PIT but after that PIT has been higher. Why these swings?
The increase in tax collection can occur for two reasons. First, an increase in the base of tax collection. That is, more entities come under the tax net. With inflation, nominal incomes rise and those who were not under the tax net also come under it. The number of people in the direct tax net has risen from 7,42,49,558 in FY17 to 9,37,76,869 in FY22. Further, those already in the tax net have a higher income. Second, if the government raises the rate of tax, collections increase. Both these factors are at play currently.
Income tax rate has been raised through a surcharge on tax payable while keeping the base rate unchanged at 30 per cent and education and health cess at 4 per cent. In 2014-15 a surcharge on income tax of 10 per cent was introduced for an income above ₹1 crore. In 2016-17, it was raised to 12 per cent and in 2017-18 to 15 per cent. In 2018-19, a surcharge of 10 per cent for income between ₹50 lakh and ₹1 crore was introduced while 15 per cent on incomes above ₹1 crore remained unchanged. In 2021-22, a levy of 25 per cent on incomes between ₹2 crore and ₹5 crore and 37 per cent on income above ₹5 crore was introduced. There was no change in surcharge for income below ₹2 crore.
In brief, while the corporation tax rate was reduced, the tax on incomes has been raised. Naturally, tax collection under PIT has increased faster than from corporation tax. Further, the big increase in income tax collection is no indication of a rapidly growing economy. It could be claimed that the increase is a result of better tax compliance due to control of black economy but that does not appear to be the case.
Narrow base of PIT
To know whether or not compliance has improved, there is need for more granular data on which entities are paying more of income tax. Detailed data is available for 2020-21 and some data for 2021-22. What does it reveal?
First and foremost, the base of tax payment in India is very narrow. Only those in the top rung of the income ladder in the country are in the income tax net. In 2020-21, 6.6 per cent of the population filed a tax return. But most of them did not pay any income tax since their income was below the taxable limit. Effectively, only 0.68 per cent of the population had high enough income to pay a significant amount of income tax, these are called the effective taxpayers. Further, 0.016 per cent declared an income above ₹1 crore with a share of 38.6 per cent of the declared taxable income.
It is this 0.68 per cent and 0.016 per cent which has had to pay a surcharge and a higher tax rate. Even if their income did not rise, they had to pay a higher tax rate.
For income between ₹2 crore and ₹5 crore, there was an increase of 3 per cent in the tax rate and for an income above ₹5 crore the increase was 6.6 per cent. This rate increase explains a part of the increase in PIT.
The other part is due to a rise in inequality in the economy. The taxpaying citizens largely belong to the organised sector. Their incomes have risen substantially and they pay more tax. The unorganised sector incomes are mostly below the taxable limit.
Further, data on Q3 of GDP for 2023-24 shows a decline in the share of consumption. This indicates a shift in incomes’ share from the poor to the well-off, since higher the income, smaller is the per cent of it consumed. So, as the income share of the well-off increases PIT would increase without compliance improving.
In brief, the rapid increase in PIT indicates increasing income disparity between the organised sector which falls in the tax net and the unorganised sector that lies largely outside the tax net. No wonder there is talk of redistribution.
The writer is retired Prof of Economics, JNU
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