Why has India’s corporate tax mop-up failed to match the pace of personal income-tax collection?

Look at 2022-23. In terms of tax buoyancy, which is an indicator of the responsiveness of tax growth to the pace of the economy, PIT fared way better than corporate income tax (CIT). If we look at the net CIT collection in the last fiscal year (Rs 825,834 crore in total), the buoyancy was just 1, whereas in the case of PIT (Rs 808,221 crore) the buoyancy was 1.2. Tax buoyancy of 1 means the pace of tax collection is equal to the growth of nominal gross domestic product (GDP). More than 1 means tax mop-up is growing faster than the economy, while anything less than 1 indicates a slower growth of tax collection as compared with the economic growth.

As far as corporate tax buoyancy in the past one decade is concerned, it has repeatedly slipped below 1 — for instance, in six consecutive years from FY12 to FY17. It moved upward in the following two years only to fall again in 2019-20, this time in the negative territory (-2.5). “In FY20, the dip in CIT buoyancy could be due to the combined impact of the economic slowdown and the CIT rate cut,” says an analysis by Ernst & Young (EY). The analysis looks at net collection, meaning tax after refund.

PIT buoyancy, too, has occasionally slipped below the threshold, for instance in FY15 and FY16, but it was above 1 in multiple years, including in the last two years, indicating robust collection of tax from individuals.

THE REASONS
Why has India’s corporate tax mop-up failed to match the pace of personal income tax collection? Should the corporate tax’s share in GDP, at 3% in FY23, be considered satisfactory when it had achieved much higher in earlier years (in the range of 3.2-3.9% during FY11-FY19)? Tax experts and income tax analysts whom ET spoke to are unanimous that CIT collection looks slow and stagnant because PIT mop-up has been extraordinary due to multiple reasons, including efficacy of digital tools, better compliance and steep rise in wages in select services sectors. They also say that the corporate tax rate, which was lowered from 30% to 25% in 2019, and the 15% concession offered to new manufacturing companies must not be tweaked in the near future, as it will be construed as India’s tax policy instability. Also, they argue, the corporate tax mop-up is still satisfactory and has not slipped into the red zone.

Vikas Vasal, tax partner of Grant Thornton Bharat, lists a number of reasons behind the high PIT collection even after the Covid-19 outbreak. “The rise in wages across sectors, especially the high-paying services sector , increased formalisation of the economy and more job creation in the organised sector post-Covid have all contributed to high personal tax collections,” he says. He also highlights other factors such as the collation of information from multiple sources like annual information statement, tax deduction at source (TDS) for individuals on sale and purchase of properties, better TDS compliance on salaries through increased awareness and enforcement and the new, simplified tax regime.

Another tax expert, Sudhir Kapadia, argues that the compliance level in CIT was always high. “But due to some transformative measures on tax digitisation undertaken by the government, the compliance level in PIT too has improved significantly,” says Kapadia, partner, tax and regulatory services, EY. He adds that the current CIT buoyancy is satisfactory.

WHAT NEXT?
Will the present trend of CIT and PIT growth continue in the near term or will the graphs behave differently? Rohinton Sidhwa of Deloitte India says, “CIT growth will continue at 14-15%. PIT should show better gains simply due to better compliance and more taxpayers.”

At present, the lion’s share of CIT comes from a handful of big conglomerates. According to the ETIG database, among 4,600 listed companies, 22 contributed 50% of tax in FY23. During the year, top 10 taxpaying companies, in descending order, were Reliance Industries, State Bank of India, HDFC Bank, Tata Consultancy Services, ICICI Bank, Power Finance Corporation, Bajaj Finserv, Coal India, Vedanta and Tata Steel. In FY22, a year hit by the deadly second wave of the pandemic, 21 companies paid tax of Rs 5,000 crore and above, constituting 46.5% of the total tax paid by listed entities.

Till June 17 of the current fiscal year, for which data is available, the gross collection of direct taxes (before adjusting for refunds) registered a growth of 12.7% over the corresponding period last year. The gross corporate tax collected during the period — Rs 187,311 crore — shrank by 1.7% over the same period last year. Direct tax kitty includes collection of CIT, PIT and securities transaction tax (STT) whereas indirect tax largely covers goods and services tax (GST).

The Q1 growth in advance tax, at 13.7%, is an early indicator of what appears to be continued growth in the current fiscal year, says Sidhwa of Deloitte. Quoting a recent report of the parliamentary standing committee on finance, EY’s Kapadia says TDS, tax collection at source (TCS) and advance tax comprise 90% of tax revenues. “With the growing speed and scale of digitisation in tax administration along with the use of intelligent data analytics by the tax department, it is expected that both PIT and CIT revenues will continue to grow at a healthy pace,” he says.

R Prasad, former chairman of the Central Board of Direct Taxes (CBDT), says the government reduced the corporate tax in 2019 mainly to have tax parity with some of India’s competitors in Southeast Asia, for example, Vietnam and Indonesia, and with the expectation that the extra cash would be deployed in new ventures, which in turn will create more jobs .

“Unfortunately, private investment has remained tepid after the pandemic even though corporate tax rates were slashed in 2019. On the PIT front, the salaried class continues to be the most taxed category,” he adds.

The 15% corporate tax slab for newly incorporated manufacturing companies is one of the lowest in the world.

For Vikram Doshi, a partner in Price Waterhouse & Co, this is a statement by the government that it is serious in wooing investments to the manufacturing sector. It’s unlikely that the government will change corporate tax rates in the near future.

However, voices demanding more tax from highly profit-making companies will only get louder if the biggies hold back their expansion plans and hold on to the cash in hand. The policy was criticised in the peak of the pandemic when tax collection had nosedived. The issue surfaces whenever there are reports on tepid private investments despite the conglomerates’ healthy balance sheets. The government has, however, made it amply clear that the corporate tax policy, for now, will continue as it is.

In this scenario, what could be the outlook for tax collection in the coming years?

Grant Thornton’s Vasal makes three points. One, with rising GDP, tax collections are bound to increase in a similar proportion. Two, with increased formalisation of the economy, total tax collections will grow rapidly. Three, the number of measures taken by the government to collate information and the use of data analytics to identify red flags are all yielding results and will help improve the tax to GDP ratio in the coming years.

With inputs from Shailesh Kadam