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March 25, 2021
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Growth Trajectory of Direct Tax Collection & Recent Direct Tax Reforms
There are reports in a certain section of media that the growth of direct taxes
collection for the FY 2019-20 has fallen drastically and buoyancy of the direct tax
collection as compared to the GDP growth has reached negative. These reports do not
portray the correct picture regarding the growth of direct taxes. It is a fact that the net
direct tax collection for the FY 2019-20 was less than the net direct tax collection for the
FY 2018-19. But this fall in the collection of direct taxes is on expected lines and is
temporary in nature due to the historic tax reforms undertaken and much higher refunds
issued during the FY 2019-20.
This fact becomes more apparent if we compare the gross collection (which
removes anomalies created by the variation in the amount of refund given in a year)
after taking into account the revenue foregone estimated for the bold tax reforms
undertaken, discussed below, which have a direct impact on the direct taxes collection
for FY 2019-20. It may also be noted that in FY 2019-20, amount of total refunds given
was Rs. 1.84 lakh crore as compared to Rs. 1.61 lakh crore in FY 2018-19 which is a
14% increase year-on-year.
I. Reduction in corporate tax rate for all existing domestic companies:
In order to promote growth and investment, the Government has brought
in a historic tax reform through the Taxation Laws (Amendment)
Ordinance 2019 which provided a concessional tax regime of 22% for all
existing domestic companies from FY 2019-20 if they do not avail any
specified exemption or incentive. Further, such companies have also been
exempted from payment of Minimum Alternate Tax (MAT).
II. Incentive for new manufacturing domestic companies: In order to
attract investment in manufacturing sector, the Taxation Laws
(Amendment) Ordinance 2019 has drastically reduced the tax rate to 15%
for new manufacturing domestic company if such company does not avail
any specified exemption or incentive. These companies have also been
exempted from payment of Minimum Alternate Tax (MAT).
III. Reduction in MAT rate: In order to provide relief to the companies which
continue to avail exemption/deduction and pay tax under MAT, the rate of
MAT has also been reduced from 18.5% to 15%.
IV. Exemption from income-tax to individuals earning income up to Rs. 5
lakh and increase in standard deduction: Further, to provide complete
relief from payment of income-tax to individuals earning taxable income up
to Rs. 5 lakh, the Finance Act, 2019 exempted an individual taxpayer with
taxable income up to Rs. 5 lakh by providing 100% tax rebate. Also, to
provide relief to the salaried taxpayers, the Finance Act, 2019 enhanced
the standard deduction from Rs. 40,000 to Rs. 50,000.
2. The revenue impact of these reforms have been estimated at Rs. 1.45 lakh crore
for Corporate Tax and at Rs.23,200 crore for the Personal Income Tax (PIT). Tax
buoyancy on gross direct tax collection after adjusting the revenue foregone for the
above mentioned tax reforms is as under:
(Rs. in crore)
Gross
Direct
Tax
Collection
for FY
2018-19
(A)
Actual
Gross
Direct
Tax
Collection
for FY
2019-20
(B)
Adjustment
due
revenue
foregone
for Tax
Reforms
undertaken
during FY
2019-20
(C)
Adjusted
Gross Direct
Tax
Collection
for FY
2019-20
(D)=(B+C)
Growth
rate in
Gross
collection
for
FY 2019-
20
(E)
(i.e., D
over A)
Nominal
GDP
Growth
rate FY
2019-20
(F)
Tax
buoyancy
FY
2019-20
(G)=(E/F)
Corporate
Tax
7,69,301 6,78,398 1,45,000 8,23,398 7.03 7.20 0.98
Personal
Income
Tax (PIT)
5,28,373 5,55,322 23,200 5,78,522 9.49 7.20 1.32
Total 12,97,674 12,33,720 1,68,200 14,01,920 8.03 7.20 1.12
3. Therefore, by removing the effect of the extraordinary and historic tax reform
measures and higher issuance of refunds during the FY 2019-20, the buoyancy of total
gross direct tax collection comes to 1.12 and almost 1 for Corporate Tax and 1.32 for
Personal Income Tax. These buoyancies indicate that the growth trajectories of both the
arms of direct taxes, i.e., Corporate Tax and PIT are intact and are rising steadily.
Further, the higher growth rate in direct taxes as compared to growth rate in the GDP
even in these challenging times proves that recent efforts for the widening of the tax
base undertaken by the Government are yielding results.
4. Furthermore, the assertion that inspite of the tax reforms, the investment has not
been picking up is not correct and is without appreciation of the reality of the business
world. The setting up of new manufacturing facilities requires various preliminary steps
like acquisition of land, construction of factory sheds, setting up of offices and other
infrastructures, etc. These activities cannot be completed in just a few months and the
manufacturing plants cannot start manufacturing goods from the next day of the
announcement of reforms. The tax reforms were announced in September, 2019 and
the results are expected to be visible in the next few months and in years to come. The
outbreak of COVID-19, may further delay this process but the growth in production due
to these tax reforms is bound to happen and cannot be stopped.
5. The Government is committed to provide a hassle free direct tax environment
with moderate tax rate and ease of compliance to the taxpayers and also to stimulate
the growth by reforming the direct taxes system. Some of the recent steps taken in this
direction, apart from those discussed above, are as under:
I. Personal Income Tax – In order to reform Personal Income Tax, the
Finance Act, 2020 has provided an option to individuals and co-operatives
for paying income-tax at concessional rates if they do not avail specified
exemption and incentive.
II. Abolition of Dividend Distribution Tax (DDT) – In order to increase the
attractiveness of the Indian Equity Market and to provide relief to a large
class of investors in whose case dividend income is taxable at the rate
lower than the rate of DDT, the Finance Act, 2020 removed the Dividend
Distribution Tax under which the companies are not required to pay DDT
with effect from 01.04.2020. The dividend income shall be taxed only in
the hands of the recipients at their applicable rate.
II. Vivad se Vishwas – In the current times, a large number of disputes
related to direct taxes are pending at various levels of adjudication from
Commissioner (Appeals) level to Supreme Court. These tax disputes
consume a large part of resources both on the part of the Government as
well as taxpayers and also deprive the Government of the timely collection
of revenue. With these facts in mind, an urgent need was felt to provide for
resolution of pending tax disputes which will not only benefit the
Government by generating timely revenue but also the taxpayers as it will
bring down mounting litigation costs and efforts can be better utilized for
expanding business activities. Direct Tax Vivad se Vishwas Act, 2020 was
enacted on 17th March, 2020 under which the declarations for settling
disputes are currently being filed.
IV. Faceless E-assessment Scheme – The E-assessment Scheme, 2019
has been notified on 12th September, 2019 which provides for a new
scheme for making assessment by eliminating the interface between the
Assessing Officer and the assessee, optimizing use of resources through
functional specialization and introducing the team-based assessment.
V. Faceless appeals – In order to take the reforms to the next level and to
eliminate human interface, the Finance Act, 2020 empowered the Central
Government to notify Faceless Appeal Scheme in the appellate function of
the department between the appellant and the Commissioner of Incometax (Appeals).
VI. Document Identification Number (DIN) – In order to bring efficiency and
transparency in the functioning of the Income Tax Department, every
communication of the Department whether it is related to assessment,
appeals, investigation, penalty and rectification, among other things,
issued from 1st October, 2019 onwards are mandatorily having a
computer-generated unique document identification number (DIN).
VII. Pre-filling of Income-tax Returns – In order to make tax compliance
more convenient, pre-filled Income Tax Returns (ITR) have been provided
to individual taxpayers. The ITR form now contains pre-filled details of
certain incomes such as salary income. The scope of information for prefilling is being continuously expanded by pre-filling more transactions in
the ITR.
VIII. Encouraging digital transactions – In order to facilitate the digitalisation
of the economy and reduce unaccounted transactions, various measures
have been taken which include reduction in rate of presumptive profit on
digital turnover, removal of MDR charges on prescribed modes of
transactions, reducing the threshold for cash transactions, prohibition of
certain cash transactions, etc.
IX. Simplification of compliance norms for Start-ups – Start-ups have
been provided hassle-free tax environment which includes simplification of
assessment procedure, exemptions from Angel-tax, constitution of
dedicated start-up cell etc.
X. Relaxation in the norms for Prosecution: The threshold for launching
prosecution has been substantially increased. A system of collegium of
senior officers for sanction of prosecution has been introduced. The norms
for compounding have also been relaxed.
XI. Raising of monetary limit for filing of appeal – To effectively reduce
taxpayer grievances/ litigation and help the Income Tax Department focus
on litigation involving complex legal issues and high tax effect, the
monetary thresholds for filing of departmental appeals have been raised
from Rs. 20 lakh to Rs. 50 lakh for appeal before ITAT, from Rs. 50 lakh to
Rs. 1 crore for appeal before the High Court and from Rs. 1 crore to Rs. 2
crore for appeal before the Supreme Court.
XII. Expansion of scope of TDS/TCS – For widening the tax base, several
new transactions were brought into the ambit of Tax Deduction at Source
(TDS) and Tax Collection at Source (TCS). These transactions include
huge cash withdrawal, foreign remittance, purchase of luxury car, ecommerce participants, sale of goods, acquisition of immovable property,
etc.
(Surabhi Ahluwalia)
Commissioner of Income Tax
(Media & Technical Policy)
Official Spokesperson, CBDT