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Source: This post is based on the article “A new direction for direct taxes”, published in Business Standard, on 13th Sep 2023.
Syllabus Topic: GS Paper 3 – Economy – Mobilisation of Resources
News: The latest data shows a decline in the government’s direct tax collections.
The government’s direct tax collections declined by 0.91% in the first four months of the current financial year. This is contrary to the Budget’s projection of 11.36% growth for the full year.
What are the issues reported in the collection of direct taxes?
First, there is a shortfall in direct tax collections despite healthy profits reported by India Inc. Corporation tax collections fell by 10%.
Second, personal income-tax collections grew by only 6.6%, much lower than the projected annual growth rate of 14%.
Third, The Union Budget for 2023-24 heavily relies on the growth of direct taxes. The shortfall in direct tax collections could jeopardize the government’s ambitious capital expenditure plan.
What are possible reasons behind the slowdown in direct tax collections?
Gradual cut in corporation tax rates and lower tax rates for individuals might be affecting collections. The effective tax rate for companies has come down from about 24.67% in 2014-15 to 22% in 2020-21.
Tax concessions offered to individual taxpayers have been rising steadily.
Companies earning over ₹500 crore have seen a decline in their effective tax rate from 23% to 19%.
What should be done?
There is an urgent need to understand why direct tax collections have not reflected the buoyancy in the Indian economy.
The tax department’s move to send notices to potential tax evaders may not be enough to address the issue.
