A big picture analysis of India’s direct tax base - Hindustan Times
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A big picture analysis of India’s direct tax base

By, New Delhi
Feb 07, 2023 06:43 PM IST

The share of both personal income taxes and corporate taxes in the gross tax revenue started growing at a fast pace as the Indian economy entered its high growth phase in the 2000s

A higher share of direct taxes is considered a hallmark of progressive tax burden. This is because direct tax burden increases as income/wealth of the taxpayer goes up. How does India fare on the direct tax front? Here are five charts that try to answer this question in detail.

The share of direct taxes had been increasing almost consistently in the period between 2000-01 and 2009-10. (Mint FIle Photo/Hemant Mishra) PREMIUM
The share of direct taxes had been increasing almost consistently in the period between 2000-01 and 2009-10. (Mint FIle Photo/Hemant Mishra)

2023-24 Budget says share of direct taxes will reach a five-year high

Budget Estimate (BE) numbers for 2023-24 put the share of direct taxes in Gross Tax Revenue (GTR) at 54.2%. This is the highest since 2018-19 when the share of direct taxes in GTR stood at 54.6%. While this is indeed a laudable development, a slightly long-term comparison shows that share of direct taxes had reached a peak of 58.9% in 2009-10. Unlike the post-2010 period, the share of direct taxes had been increasing almost consistently in the period between 2000-01 and 2009-10.

Corporate tax, not personal income tax, has led to long-term fall of direct tax share in Gross Tax Revenue

As the Indian economy entered its high growth phase in the 2000s, the share of both personal income taxes and corporate taxes in GTR started growing at a fast pace. Personal income tax had a share of less than 20% in GTR in 2012-13. This is expected to reach an all-time high of 26.8% in 2022-23 (RE) and 2023-24 (BE). However, the share of corporate taxes, which stood at 39.2% in 2009-10 fell sharply in the aftermath of the Global Financial Crisis and reached 31.9% in 2018-19. This number has fallen further, thanks to the reduction in corporate taxes announced in September 2019. Given the fact that the share of corporate taxes in total GTR has not increased after the tax cuts, it can be said that they have not had much of a positive impact on tax collections.

Is India an underperformer when it comes to collecting direct taxes?

Not really, suggests an analysis of data from the Organization for Economic Cooperation and Development (OECD). The latest comparable estimates for G7 countries are available for 2020; the pre-pandemic estimates do not differ a lot.

India’s share of income tax collections from individuals in total tax revenues was 24.5% in 2020. This is higher than Japan (18.7%) and France (21%), but lower than US (40.6%), UK (28.6%), Italy (26.8%), Germany (27%) and Canada (36.9%). To be sure, India’s lower income tax share should be read with the fact that per capita incomes are significantly lower in India than G7 countries. This becomes clear when we compare taxes as a share of GDP and not GTR.

However, India’s share of income tax collections from corporations in total tax revenues was the highest (27.7%) among all in 2020. Most of the G7 countries, except Canada (11.8%) and France (11.7%), had their corresponding share from corporations less than 7.5% in 2020. This is more likely to be a result of big corporations shifting their profits to tax havens than Indian companies being more profitable than their western counterparts are. Having said this, there are two major problems with India’s direct tax regime.

A skewed direct tax base

This holds true for both personal and corporate tax collections. An HT analysis on January 30 had highlighted that the 64% of direct tax collections came from taxpayers with incomes above 50 lakh in 2018-19, which account for just 0.16% of the income tax returns filed in the country. Annex-7 of the Receipts Budget document allows one to know the disaggregated incidence of tax on corporations with different profit size. In 2020-21, 53.5% of the total corporate income-tax liability came from those firms with profits before taxes greater than 500 crore, and 15.5% from those with profits before taxes between 100 and 500 crore. In other words, just 0.21% of total companies pay 69.1% the total corporate tax in India.

Dispute with taxpayers

Annex 5 of the Receipts Budget gives information about the amount of taxes which have been raised but not realised. The budget gives this amount under two heads: amount under dispute and amount not under dispute. The latter is on account of reasons such as no assets or inadequate assets for recovery, assessee not traceable, etc. This is a stock value and it includes disputes carried forward from previous years.

An HT analysis of this data shows that the share of taxes raised but not realised in GTR has declined from 80% in 2020-21 to 58.4% in 2021-22, the latest period for which this information is given in this year’s budget. While the amount of taxes under dispute is a welcome development, the latest share is still the third-highest figure since 2004-05. 88% of total revenues raised but not realised are under the head of direct taxes and a large part of it is under dispute. The government will do well to bring down this number further.

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  • ABOUT THE AUTHOR
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    Pavitra Kanagaraj is a data journalist. She uses public and private datasets to cover economy, women, and politics. Prior to HT, she did macroeconomic research at UNESCAP and ERF. She co-founded the Rethinking Economics chapter at JNU in 2021.

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