Tax finance concept with bill and magnifying glass. Vector illustration | Photo Credit: wissanu99
Ongoing tax reforms boosted collections in FY22 but FY23 may see flatter tax revenue growth due to headwinds
The Centre has reasons to be pleased about the robust tax collections in 2021-22, which have exceeded the initial budget estimate by almost ₹5-lakh crore. These higher-than-expected collections have contributed in a large way towards reining in the fiscal deficit, providing some relief to the government’s finances. The pre-actual revenue collection for 2021-22 at ₹27.07-lakh crore being higher than the revised estimate of ₹25.16-lakh crore projected in the Union Budget of 2022 also reflects efficient management of the third wave of the pandemic, when the economy remained relatively unaffected. Also, with the actual collections for FY22 being quite close to the budget estimate for FY23 which is projected at ₹27.57-lakh crore, there is a strong likelihood of higher than budgeted gross tax collections this fiscal year, too.
That said, the growth in tax collections in 2022-23 is unlikely to match the growth numbers recorded in 2021-22. There are several factors supporting this assumption. One, the 49 per cent growth in direct tax collection and 20 per cent rise in indirect tax collection were mainly due to base-effect. Since there was a steep decline in tax revenue in 2020-21, when there were periods of complete lockdown, comparative figures for 2021-22 appear robust. Both direct as well as indirect tax collections contracted in FY21, when compared with the previous fiscal. Two, corporate tax collections were very strong in FY22 because earnings were boosted by low finance and input costs and recovery in demand. Lower and simplified corporation tax rates introduced in 2019 also seem to have led to better compliance. But the growth could taper this fiscal year as companies stare at a dent in margins due to rising input costs, higher interest rates as well as disruptions in global supply chain due to the ongoing war. Three, greater scrutiny of GST returns using technology and introduction of mandatory uploading of e-invoices for B2B transactions seem to have reduced tax leakages and resulted in growth of GST collections by 28 per cent last fiscal year. But with higher inflation impacting consumption, indirect tax collections are also expected to taper down this year.
That said, there were some healthy trends witnessed last year, which will, hopefully, continue. The ratio of direct to indirect taxes improved from 0.9 in 2020-21 to 1.1 in 2021-22. Direct tax collections should ideally be higher than indirect taxes since the former is linked to the income earned by the entity whereas the incidence of the latter is the same for all taxpayers. This makes indirect taxes more burdensome for low-income earners. The income tax department has also set a record of sorts by processing 22.4 per cent of returns on the same day in 2021-22 and 75 per cent of the returns in less than a month’s time. This has enabled payment of IT refunds amounting to ₹2.24-lakh crore last fiscal year. This speed needs to be maintained in order to improve the experience for taxpayers. The Centre should also continue its efforts to simplify the tax structure and return filing process, since these seem to have contributed in a big way to the tax buoyancy last year.
Published on April 19, 2022