Gradual revival in economic activity? Decline in direct tax mop up eases

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The rate of contraction in direct tax collection has reduced thanks to the payment of the second one installment of advance tax, indicating a gradual revival of economic activity in some sectors in the current quarter.


Direct tax collections, net of refunds, declined by 22.6 per cent year-on-year (YoY) as of September 15, in comparison to a 30 per cent contraction till September 2. The decline in gross direct tax collections slowed to 16 per cent from the 21 per cent reported approximately a fortnight ago.


Even if the deadline for paying the second one installment of advance tax ended on Tuesday, the last numbers are yet to be collated and up to date by banks. The last figures might show further easing in contraction.


Net direct tax collection stood at Rs 2.53 trillion as of September 15, down from Rs 3.27 trillion a year ago, according to provisional numbers shared by a government official. Refunds are marginally higher at Rs 1.04 trillion, as against Rs 1.01 trillion the preceding year.


Advance tax is tax paid as and when the money is earned, relatively than at the end of the fiscal year. This is seen as an indicator of economic sentiment.


The first installment is to be paid by June 15 (15 per cent), second by September 15 (30 per cent), third by December 15 (30 per cent) and the remaining 25 per cent by March 15.


“These are provisional numbers and will likely be revised in a day after banks update the last data. Certainly, the overall numbers are showing a bit of an improvement in the trend, as the second one quarter saw revival in economic activity with the unlocking process picking pace,” said a government official.


Bengaluru continued to be the only city to record growth in tax collection, the official said. The city saw a 10 per cent growth in direct tax collection by September 15 at Rs 41,000 crore, as against Rs 37,000 crore the preceding year.


“Most IT companies have gained because of the Covid lockdown, with online transactions seeing a rise. But even so, their operations were unaffected on account of work at home. In addition, these IT players get a large number of commerce from in another country clients, which diversifies their earnings,” said the official.


Mumbai saw direct tax collection dip by 13.9 per cent to Rs 75,000 crore as of September 15, from Rs 86,000 crore a year ago. Delhi and Chennai were deep in negative territory with declines of 33 per cent and 37 per cent, respectively. Pune posted a 30 per cent contraction in collection and Hyderabad used to be down by 24 per cent.


In 2019-20, the income tax branch missed the reduced direct tax collections target by Rs 1.17 trillion, mopping up Rs 10.53 trillion, a 7.8 per cent fall over the preceding year.


“Direct tax collection is a operate of economic activity. With GDP (gross domestic product) growth at (-)23.9 per cent, one can’t expect tax mop up to show growth. It’ll be unrealistic. Alternatively, the officers should be handed out realistic targets to work on and redraft the collection strategy for the fiscal,” said another official.


The direct tax to GDP ratio fell to its lowest in 14 years in 2019-20, at 5.1 per cent, while the oblique tax to GDP ratio used to be at a five-year low. This used to be even if the lockdown used to be in force for only a week at the end of the year.


Approximately 45 per cent direct tax revenue collection comes from advance tax, 35 per cent from TDS (tax deduction at source), 10 per cent from self-assessment and 10 per cent from recovery.

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