Reports Of Corporate Income Tax Not Picking Up Pace Are A Concern!

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  • On the back of the pandemic restrictions and the subsequent Russia-Ukraine conflict rendering global economic growth a great challenge to every country, Indian leadership’s decisive fiscal moves have been well appreciated at home as well as overseas. The Indian economy has not done badly in comparison to other countries despite facing adverse global supply chain disruptions. Not only this, the geopolitical situation too hasn’t been conducive with the Chinese positioning aggressively even as the global community joins hands together to tame the Dragon nation. The rules-based global order is under strain for various reasons but the Indian government has succeeded in staying afloat courtesy of some smart fiscally prudent measures.

PC: Freepik

  • The Indian citizens, irrespective of social status, have responded quite positively so far by showing enough resilience in the face of grave adversities. Let us see how the country is doing vis-à-vis revenue generation and GDP parameters. As reported recently, data on direct taxes for the period up to March 10 of the financial year 2022-23 showed that it had increased by 16.8% to Rs 13.7 lakh crore. The growth rate is a little higher than the growth forecast of 16% for nominal GDP. But within direct taxes, the performance of corporate income tax (CIT) has been disappointing. CIT collections till March 10 grew 13.6%, lagging the growth rate of nominal GDP. In other words, each percentage point growth in GDP yielded a lower amount of CIT growth.
  • Further, tax buoyancy, which measures the growth in taxes to economic growth, is a useful measure of the response of the tax system. By this measure, India has a problem with CIT. To understand better, let’s go back to the period between 2000-01 and 2009-10. Direct tax collections and buoyancy boomed mainly on account of surging CIT. During that phase buoyancy of direct taxes exceeded 2 on five occasions, a record that wasn’t matched subsequently. Moreover, the contribution of direct taxes to total tax collections increased from 36.3% in 2000-01 to 60.8% in 2009-10. It resulted in a fairer tax system. Since then, CIT collections have generally disappointed. For instance, in 2014-15, CIT made up 34.5% of gross tax revenue.

PC: Freepik

  • Over the next few years, its relative contribution declined and it now contributes about 27.4%. Indeed, tax rates have not been static and substantial cuts were made in 2019 to bring India’s rates in line with a relevant peer group. However, CIT buoyancy had been declining even before these big cuts. Note that in the five financial years preceding the big cuts of 2019, CIT’s buoyancy was below 1 in three of those years. And in 2022-23, the indications are that it will once again remain below 1. Personal income tax (PIT) has yielded better returns and in 2022-23 is set to grow around 20%. Ensuring CIT’s buoyancy to enhance public investment is imperative. Thus, closer attention to this aspect would be par for the course move.