Direct Tax To Total Tax Collection Dipped 270 Bps In Past Decade: CBDT Data

The direct tax to the total tax collection has decreased by 270 basis points in the last ten years, as per the latest data from the Central Board of Direct Taxes (CBDT).

The data depicts the comprehensive trends in the last two decades, according to which in the fiscal year 2013-14 (FY14) the direct tax collection was Rs 6,38,596 crore and the total tax collection was Rs 11,33,943 crore, which highlights that direct tax to total tax ratio was 56.32 per cent during FY14.

Whereas, the direct tax to total tax ratio has decreased to 54.62 per cent in the fiscal year 2022-23 (FY23), showing a decrease of 270 basis points (bps). The direct tax collection stood at Rs 16,63,686 crore and the total tax collection stood at Rs 30,45,699 crore in FY23, which is an increase of Rs 10,25,090 crore and Rs 11,33,943 crore respectively. 

However, experts suggested that the decrease in direct tax in the total collection implies that there is an increase in indirect tax collection. Since indirect taxes are regressive in nature, therefore, they affect both the rich and poor equally, therefore this trend needs to be discussed.

“According to recently released data from the Central Board of Direct Taxes (CBDT), the proportion of direct taxes to total tax revenue has witnessed a decline over the past decade, juxtaposed with a notable increase in revenue garnered from indirect taxes. While this shift signifies a significant transformation in the tax landscape, it also raises concerns about the economic implications, particularly regarding the reliance on regressive taxation. Indirect taxes, by their nature, are regressive, as they are levied uniformly regardless of the taxpayer's income bracket, placing an equal burden on all individuals irrespective of their financial standing. However, the surge in indirect tax collections in India can be attributed to various factors, prominently the introduction of the Goods and Services Tax (GST), which streamlined numerous disparate indirect tax impositions,” said Krishan Arora, Partner, Grant Thornton Bharat.

The idea of a nationwide GST in India was first proposed by the Kelkar Task Force on Indirect taxes. The objective was to replace the prevailing complex and fragmented tax structure with a unified system that would simplify compliance, reduce tax cascading, and promote economic integration. GST Act came into force on 1 July 2017.

“Additionally, the effective implementation of GST and owing to the effective deployment of technology and artificial intelligence tools by the Union government has expanded the tax base, encompassing more businesses within the formalised tax framework, consequently bolstering revenue streams. Furthermore, the consistent growth of India Inc and its burgeoning Gross Domestic Product (GDP) have contributed to the uptick in indirect tax collections. Nevertheless, it's imperative to acknowledge that India's direct tax collections for the fiscal year 2023-24 have exhibited substantial growth, with provisional figures indicating a robust 20.66 per cent surge in net collections compared to the corresponding period of the previous fiscal year,” Arora added.

Experts also suggested that the introduction of the New Tax Regime may be one of the reasons for a decrease in direct tax collection in absolute terms.

Amit Gupta, Partner at Saraf and Partners said, “The Government in the recent budgets has doled out various measures to widen the tax base and counter tax evasion whilst continuing its endeavour to simplify the tax legislation and facilitate compliances. There has been a slew of changes to push the New rationalised taxation regime for individuals ever since its introduction vide Finance Bill 2020 with the intent to enable taxpayers to carry out Income-tax compliances without seeking any professional assistance. In the Budget Speech, the Finance Minister suggested that the personal income tax rates will entail an estimated revenue forgone of approximately Rs 40,000 crore per year.”

Gupta further added that some recent studies have suggested a recent trend of personal tax filing migrating towards higher gross income tax slabs and on the corporate tax front, the tax exemptions and deductions have largely been phased out and accordingly, the corporate taxpayers were offered favourable corporate tax regimes.

“Albeit such rationalisations, owing to the thrust on compliances, there has been a considerable increase in the tax filings and resultant income tax collections. Further, the rise in the indirect tax kitty which subsumes indirect tax levy on consumption can be attributed to higher consumer spending and economic activity(including inflation) in the Indian landscape coupled with anti-evasion and collection measures undertaken by the Indirect tax administrative agencies,” Gupta pointed out.

The CBDT data also shows that the direct tax to GDP ratio has increased from 5.62 per cent to 6.11 per cent in the last decade. Maharashtra, Karnataka and Tamil Nadu are top contributors of direct taxes in the FY23 with tax collections of Rs 6,05,268.35 crore, Rs 2,08,168.88 crore and Rs 1,07,063.82 crore respectively. The sampled data also include the time period when the world was struggling with the Covid-19 pandemic, therefore experts also mentioned that post-Covid, there is a resurgence of direct tax collection.

“The last ten years saw a lot of fluctuation in the ratio of direct to total tax collections. Direct tax collection dipped substantially in FY21 when the world was going through a global recession due to Covid-19 pandemic. Since then, the ratio of direct tax to the total tax revenue has been increasing. It is anticipated that in the upcoming years, the contribution of direct taxes will follow an upward trend and may go as high as 60 per cent. It would not be the first time that direct taxes would have contributed more than 60 per cent to the total tax revenue. In FY10, due to surging corporate income tax, direct tax comprised 60.78 per cent of the total tax revenue collection. Since then, the contribution of corporate income tax has declined,” said Rahul Charkha, Partner at Economic Laws Practice.

In FY20, the tax collection decreased to Rs 10,50,681 crore from Rs 11,37,718 in FY19, also tax buoyancy entered negative territory with 1.21 per cent. Now, the tax collection has surpassed pre-Covid tax levels with tax collection reaching Rs 16,63,686 crore. Also the tax buoyancy has been 1.18 per cent in FY23.

“The tax buoyancy factor has increased marginally from 1.16 per cent in FY 2013-14 to 1.18 per cent in FY 2022-23. The Government may use this as an opportunity for more strategic use of the direct tax system to boost domestic resource mobilisation. The role of a progressive direct taxation system is extremely important for ensuring both horizontal and vertical equity. Horizontal equity would ensure taxpayers in similar financial conditions are treated similarly. Vertical equity, on the other hand, means that taxpayers who are better off should contribute more or at least pay the same proportion of income in taxes as those who are less well off,” Charkha added

As per CBDT, in FY 2022-23, 7.4 crore taxpayers filed tax returns. The Government may introduce policies to increase the tax base and implement strong administrative measures to monitor the collection and withholding of taxes experts suggested.