India Economy

Direct taxes show the way

TCA Sharad Raghavan | Updated on April 29, 2018

Direct tax collections have made up some of the shortfall in indirect taxes

The April figures for the collections under the Goods and Services Tax, for which the collections under the fledgling e-waybill system will be taken into account for the first time, will be important for the government. The e-waybill system is one of the government’s last big hopes for a boost to the lower-than-expected collections so far.

Direct tax collections have so far compensated for some of the shortfall in indirect taxes, but that’s not what was supposed to happen. A combination of demonetisation, cracking down on tax evaders and GST was supposed to boost revenue in total.

The provisional figures of April 2017-February 2018, the latest data we have, show that net direct tax collections are at ₹7.44 lakh crore, a very strong 19.5 per cent higher than in the corresponding period of the previous year. Within this, corporate tax collections grew 19.7 per cent and personal income tax collections grew 18.6 per cent.

This compares very favourably to last year’s figures for the same period (April 2016-February 2017), when direct tax collections grew 10.7 per cent, corporate tax collections 2.6 per cent, and personal income tax collections 19.5 per cent. The stronger performance of corporate tax collections can be put down in large part to the Goods and Services Tax and the increased formalisation it has forced upon the economy.

As for the personal income tax collections, the zeal of the Income Tax Department is apparent from the fact that the data we have so far for FY18 show only a marginally slower growth than the data for the same period of FY17, even though the latter incorporates the demonetisation aftermath.

Indirect taxes, the culprit

Overall, direct taxes are unlikely to be a problem for the government. Demonetisation forced a lot of people into the formal tax system, and GST did the same for companies. Add to that the fact that the government has been systematically reducing the corporate tax rate. Hence, small companies are not only being forced to declare their earnings, but also no longer have strong incentives to evade the tax man.

The problem seems to be in the indirect taxes, that is, in GST. The government on Friday said that the total collections from GST from its inception on July 1, 2017, to March 2018 stands at a provisional ₹7.41 lakh crore, which works out to an average of a little more than ₹82,000 crore a month. This is far less than what tax experts say collections should be, given what they were on a monthly basis in the pre-GST regime. Most peg the expected number at about ₹1 lakh crore a month, if not more.

There are several reasons for GST collections falling short of expectations. One is to do with the systemic factor of the government reducing the tax rates on a wide range of goods from the highest tax slab of 28 per cent to the mid-range ones of 12 and 18 per cent.

The second, more concerning reason is that not enough people registered on the GST system are actually filing their returns. The data released on Friday show that while 57.7 per cent of registered taxpayers filed returns by the due date for July 2017, this proportion increased only to 62.6 per cent in March 2018.

Government’s last hope

There is a large segment of the taxpayers that is simply not filing returns. These people will eventually file their returns —96 per cent of those who had to file their returns for July 2017 had done so by March 2018. But in the meantime, the government has little to no idea of its complete position. The Centre’s next big hope for boosting GST revenues is the rollout of the e-waybill system. The billing system for the inter-State and intra-State transport of goods, rolled out on April 1, 2018, stands to bring a lot of smaller transporters into the tax net, and document and tax their transportation activities.

The GST revenue data incorporating the e-waybill collections will come out in early May. That seems to be the government’s last hope for higher indirect tax collections. From the salaried class’ perspective, higher GST revenues are the only way the government will even consider easing the personal income tax burden.

Published on April 29, 2018

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