The recently released direct tax collection numbers up to March 17 indicate that direct tax revenue is continuing to grow at a healthy rate, led by fiscal measures and improved compliance. Net direct tax collection, at ₹18.9-lakh crore, was 20 per cent higher compared to ₹15.77-lakh crore collected in the same period in FY23. The strong growth in direct taxes will help buttress the gross tax revenue this year given the sluggish growth in indirect taxes — 4 per cent decline in excise duty collection and just 2 per cent increase in custom duties, according to revised estimate for FY24. Within the direct tax collections, personal income tax is doing the heavy lifting, with growth of 23 per cent, compared with 12 per cent growth in corporate tax collections in the revised estimates for FY24.
Personal income tax revenue has been registering a very strong growth trajectory, above 20 per cent, since FY22. This has been led by initiatives such as pre-filling of returns with data captured from various sources including salary, interest, dividend and brought forward losses and the annual information statement, which captures all the income which is likely to be missed by the taxpayer. These initiatives are helping increase the tax paid by existing taxpayers. More transactions being subject to tax collection at source, while increasing the compliance burden for honest taxpayers, could be aiding in checking evasion. While the growth in personal income tax collections is laudable, it needs to be noted that the tax base is not increasing at the same rate. Number of individuals filing tax returns has grown at a much slower pace, at 4.5 per cent between FY20 and FY23. This implies that the existing tax base, comprising primarily of the salaried taxpayer cohort, is facing the higher tax incidence.
The increase in personal income tax collections has been accompanied by tepid corporate tax collections. Since FY21, revenue from personal income tax has been higher than that from corporate tax. If the time series of direct tax collections is seen, corporate tax collections have always been higher than income tax collections from 2000-01 to 2019-20, with the difference ranging between 60 and 80 per cent in most years. This trend has changed since FY21, and the personal tax collections are now estimated to be 10 per cent higher than corporate tax in FY24 and FY25.
The falling trend in corporate tax collections confounds even if one factors in the sharp reduction in corporate tax rate in FY20. Companies have displayed resilience to domestic and global growth challenges and have reported healthy growth in profits the last few years. This is something for the Centre to examine. Meanwhile, personal income tax payers cannot be faulted if they have a grouse over coughing up more taxes every year, with high rates being a clear red rag. While latest data is not available for gauging conversion to the new tax regime, the fact is that more needs to be done to make the new regime attractive. The next government at the Centre has a job at hand in reforming personal income tax.
I