The Central Board of Direct Taxes (CBDT) has reported a nearly 5% drop in gross direct tax collections for the financial year (FY) 2019-20, compared to the previous year. The collections in 2019-20 stood at Rs. 12.33 lakh crore as compared to Rs. 12.97 lakh crore in FY 2018-19.
Understanding Direct Tax
Direct taxes are those where the incidence and impact of taxation fall on the same entity and cannot be shifted to someone else. Examples of these taxes include income tax, corporation tax, property tax, and more. They largely focus on taxing income or wealth.
Factors Contributing to Reduced Direct Tax Collection
The decrease in direct tax collection can be attributed to several factors, including tax reforms introduced in 2019 and substantial refunds given in the fiscal year 2019-20.
Tax Reforms
In 2019, there were significant changes in tax regulations that included reduction in the corporate tax rate to 22% for all existing domestic companies, and a lower tax rate of 15% for new manufacturing domestic companies. Individuals earning an income of up to Rs. 5 lakh were exempted from income tax. Additionally, the standard deduction increased from Rs. 40,000 to Rs. 50,000.
High Refunds
Refunds also played a role in the reduced direct tax collection. In FY 2019-20, total refunds amounted to Rs. 1.84 lakh crore, marking a 14% increase from Rs. 1.61 lakh crore in FY 2018-19.
Tax Buoyancy
When excluding the effects of the tax reform measures and higher issuance of refunds, the tax buoyancy for gross direct collection, corporate tax and personal income tax was positive. This indicates that despite the challenges, efforts by the government to widen the tax base have been fruitful.
Investment
Tax reforms introduced in September 2019 aimed to stimulate growth and investment were unable to make an immediate impact because of preliminary steps required to set up new manufacturing facilities. The Covid-19 outbreak also contributed to the delay.
Government Measures to Boost Direct Tax and Investment
The government has made several moves to raise direct tax and investment including the abolition of Dividend Distribution Tax and launching Vivad se Vishwas to settle pending tax disputes. It introduced digitalised transactions to reduce unaccounted transactions and raised the monetary limit for filing appeals.
Extension of TDS/TCS Scope
To broaden the tax base, more transactions have been brought under the purview of Tax Deduction at Source (TDS) and Tax Collection at Source (TCS). These include large cash withdrawals, foreign remittance, luxury car purchases, e-commerce business, sale of goods, property acquisition, etc.
Key Terms Explained
Corporate Tax: A government levy on a firm’s profit after deducting operating expenses. Rates vary for domestic and foreign corporations.
Dividend Distribution Tax (DDT): Payable by corporations on dividends given to shareholders. Higher dividends mean a higher tax burden.
Minimum Alternate Tax (MAT): Introduced to ensure zero tax paying companies also contribute to tax revenues. It was first introduced in 1987, then withdrawn in 1990, before being reintroduced in 1996. The MAT is a key tool to prevent tax avoidance.
