Economic contraction easing? Direct tax mop-up down, but not like earlier

The decline in gross direct tax collections slowed to 16 per cent from the 21 per cent reported about a fortnight ago
The rate of contraction in direct tax collection has reduced thanks to the payment of the second installment of advance tax, indicating a gradual revival of economic activity in some sectors in the current quarter.

Direct tax collections, net of refunds, declined by 22.6 per cent year-on-year (YoY) as of September 15, compared to a 30 per cent contraction till September 2. The decline in gross direct tax collections slowed to 16 per cent from the 21 per cent reported about a fortnight ago.

Although the deadline for paying the second installment of advance tax ended on Tuesday, the final numbers are yet to be collated and updated by banks. The final figures might show further easing in contraction. 

Net direct tax collection stood at Rs 2.53 trillion as of September 15, down from Rs 3.27 trillion a year ago, according to provisional numbers shared by a government official. Refunds are marginally higher at Rs 1.04 trillion, as against Rs 1.01 trillion the previous year.

Advance tax is tax paid as and when the money is earned, rather than at the end of the fiscal year. This is seen as an indicator of economic sentiment.

The first installment is to be paid by June 15 (15 per cent), second by September 15 (30 per cent), third by December 15 (30 per cent) and the remaining 25 per cent by March 15.

“These are provisional numbers and will likely be revised in a day after banks update the final data. Certainly, the overall numbers are showing a bit of an improvement in the trend, as the second quarter saw revival in economic activity with the unlocking process picking pace,” said a government official. 

Bengaluru continued to be the only city to record growth in tax collection, the official said. The city saw a 10 per cent growth in direct tax collection by September 15 at Rs 41,000 crore, as against Rs 37,000 crore the previous year.

“Most IT companies have gained due to the Covid lockdown, with online transactions seeing a rise. Besides, their operations were unaffected because of work from home. Moreover, these IT players get a lot of business from overseas clients, which diversifies their earnings,” said the official.

Mumbai saw direct tax collection dip by 13.9 per cent to Rs 75,000 crore as of September 15, from Rs 86,000 crore a year ago. Delhi and Chennai were deep in negative territory with declines of 33 per cent and 37 per cent, respectively. Pune posted a 30 per cent contraction in collection and Hyderabad was down by 24 per cent.

In 2019-20, the income tax department missed the reduced direct tax collections target by Rs 1.17 trillion, mopping up Rs 10.53 trillion, a 7.8 per cent fall over the previous year.

“Direct tax collection is a function of economic activity. With GDP (gross domestic product) growth at (-)23.9 per cent, one can’t expect tax mop up to show growth. It will be unrealistic. However, the officers must be handed out realistic targets to work on and redraft the collection strategy for the fiscal,” said another official.

The direct tax to GDP ratio fell to its lowest in 14 years in 2019-20, at 5.1 per cent, while the indirect tax to GDP ratio was at a five-year low. This was despite the fact that the lockdown was in force for only a week at the end of the year.

About 45 per cent direct tax revenue collection comes from advance tax, 35 per cent from TDS (tax deduction at source), 10 per cent from self-assessment and 10 per cent from recovery.

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