BS Number Wise: Tax mop up shines through fragile recovery

A government’s tax collections depend on the state of the economy: that’s the pattern. When the coronavirus pandemic hit last year, India's economy shrank 7.3 per cent to pull down corporation and income-tax collections. Muted goods and services tax (GST) collections in the first half of the year forced the government to borrow and compensate states for their revenue shortfall.

That story changed from the second half of 2020-21, with tax collections becoming almost independent of economic performance.

Direct-tax-to-GDP ratio in the first quarter of 2021-22 increased to 5.14 per cent, compared with 3.29 per cent over the last two years, riding on the back of growth in corporation tax collection and personal income tax. Direct taxes now have a larger share of India’s GDP when most international agencies are slashing the country’s growth forecast for the current financial year. The trend is unusual as economic growth suffered in Q1 this year due to the second wave of Covid-19 infections.

GST collections exceeded the Rs 1-trillion mark for eight months till May, though the economy’s supplies -- captured through electronic way bill generation -- fluctuated. GST collections have become almost independent of high frequency and macroeconomic indicators.

In November 2020, there was a mere 4 per cent growth in e-way bill generation on a year-on-year basis, but GST collections for December were a record Rs 1.15 trillion. Sequentially, e-way bill generation declined in November compared to October. As e-way bill generation improved marginally to 64.1 million in December from 57.7 million in November, tax collections soared to another record level of Rs 1.19 trillion in January.

According to GST laws, an e-way bill is mandatory for moving goods valued above Rs 50,000. Business transactions of a month reflect in GST collections with a month’s lag. E-way bills fell from 71.2 million in March to 58.7 million in April, but GST collection in May breached the Rs 1-trillion mark.

Corporation tax collections nearly doubled in the first quarter of 2021 compared to the same period last year. They grew 75 per cent when compared with the corresponding period in 2019-20, a period before the coronavirus. Personal income tax grew by 87 per cent in Q1 of FY22 compared to the previous financial year and 28 per cent in 2019-20.

What explains the rise in tax collections in a slowing economy?

Tax department officials attribute it to better compliance and enforcement. By introducing data sharing on income tax, customs and GST, the government can track income mismatches. An official said the income tax department could draw an entire network diagram if a fake bill was generated.

The launch of mandatory e-invoicing in a phased manner from October 2020 has helped tax collection. It has helped curb fake GST invoices, and ensured genuine input tax credit claims. In September, the government brought in Aadhaar-based GST registration to prevent fraud — another measure to improve collection.

The question is if this trend in tax collection is sustainable.