Growth Slowdown: Direct Tax Mop-Up Growth Slumps to 3.5% Till Mid-October

New Delhi: The government might be impelled to steeply cut its direct tax collection target, with growth in this regard slumping to 3.5% up to mid-October from the same period in the earlier financial year, as against the Budget target of 17.3%. The year formally began on April 1.

A combination of factors is responsible. This includes a deepening of the general economic slowdown and corporation tax cuts. Collection will have to rise by 30% cent in the remaining period of the financial year to achieve the Budget estimate.

Last month's rise in direct tax collection was 5%. In the first six-and-a-half months, corporation tax revenue grew by only 2.5%.

The growth target was unrealistic to begin with, looking at the economic activity slump. The corporation tax rate cut will further impact collection. The numbers will likely see a steep downward revision in the upcoming Budget for the next fiscal,” said a government official.

Also read: Will the Corporate Tax Cut Boost the Economy?

To arrest corporate slowdown, finance minister Nirmala Sitharaman had announced steep cuts last month in corporation tax, with retrospective effect from April 1. The rate was cut from 30% to 22% for existing companies that do not enjoy any exemptions. And, to 15% from the earlier 25% for new manufacturing companies. With surcharge and cess, the effective rate for existing companies has come down to 25.17%, from 35%.

According to an earlier report in this publication, combined tax outgo for the September quarter was down 3.1% year-on-year. As a result, the average effective rate of tax for the sample of 200 firms declined to 22.9% during the quarter, as against 28.5% in the year-ago one. The tax cut boosted post-tax earnings by Rs 3,900 crore, equivalent to 5.6% of their pre-tax profit of the September 2019 quarter.

This means lower collection for the government in the immediate term. The hope is that the rate cuts would revive corporate sector growth, resulting in higher tax collection. “That will be somewhere in the medium term,” said the official.

Last week, revenue secretary A.B. Pandey told Business Standard the government would consider revising the steep collection target. "We will consider that next month, when the Budget making exercise (for 2021-22) will start. At that time, we will take stock of revenue collection and projection for next year and come up with revised estimates."

Also read: No Plans To Revise Fiscal Deficit Target or Cut Spending Now, Says Nirmala Sitharaman

Overall advance tax collection, including corporate and personal income, grew 6% between April and September, the first six months of 2019-20, as against 18% in the year-ago period, according to sources. Collection after the second instalment stood at Rs 2.2 trillion. Within the collection, corporation tax mop-up grew 6.5% and personal income tax by 3.5%.

Advance tax growth thus far in 2019-20 is the lowest in at least four years. The growth rate was 18% in 2018-19, 11% in 2017-18 and 14% in 2016-17 in the same period.

About 45% of direct tax revenue collection comes from advance tax, 35% from tax deduction at source, 10% from self-assessment and 10% from recovery.

By arrangement with Business Standard. 

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