Tax administration finally being cleaned up, being made more efficient

At the start of this month, the government announced that it had collected a record Rs 1.42 trillion as GST revenue in March 2022, breaking the previous record of Rs 1.4 trillion set just two months earlier.

This is a remarkable number, and not just because it is the highest ever. It is remarkable also because it caps an outstanding year as far as GST collections are concerned. With average monthly collections at Rs 1.24 trillion, there were only two months in the entire financial year in which collections were below the Rs 1.1 trillion mark. Those were May and June of 2021, which were impacted by the second wave of the coronavirus (Covid-19) pandemic.

In fact, GST collections dropped below the Rs 1.2 trillion mark only once in the last six months. These are astounding statistics for a tax system that naysayers had written off as being a failure. It was not too long ago that economists were lamenting the fact that GST collections were struggling to breach the Rs 1 trillion mark.

So, what happened in the last year-and-a-half? This would have been easy to explain if the economy was booming, but it isn’t. It could also perhaps have been explained had the share of IGST been increasing, but that too has remained the same since GST was implemented.

Let’s look at direct taxes.

According to the CBDT, net direct tax collections for FY2021-22 as of March 16, 2022 stood at Rs 13.6 trillion, which is 48.4 per cent higher than the same period of FY2020-21. For those who would pooh-pooh this because FY2020-21 was the pandemic year, this year’s collections were also 42.5 per cent and 35 per cent higher than the pre-pandemic years of FY2019-20 and FY2018-19, respectively. Mind you, this is direct tax and so the high rates on fuel don’t have an impact here.

The net direct tax collections included corporate tax receipts of Rs 7.19 trillion (about 13.2 per cent higher than the Revised Estimates) and income tax receipts of Rs 6.4 trillion (about 4.2 per cent higher than the Revised Estimates). In total, net direct tax collections are more than Rs 1 trillion higher than the Revised Estimates for the year.

There are two theories for why tax collections across the board have been growing so strongly. The first is that this is genuine tax buoyancy, driven by a strongly-growing economy. The government would just love to hear that, wouldn’t it?

The other possible explanation is that the taxman is finally doing his job properly. The understanding in the first few years of GST was that, because it was such a new tax, the tax officials would go easy on businesses making mistakes in their tax filings and payments. We are now coming up to five years of GST and whatever grace period was granted is now over.

GST officials have been cracking down left, right and centre on those who are mis-invoicing, under-invoicing and generally avoiding their legitimate GST dues.

On the direct tax side, the government has implemented its faceless assessment system in which it’s the computer that judges whether your return is kosher or not. While still prone to errors due to the humans keying in the past information into the system, this is still much more effective than leaving the whole thing up to the discretion of the tax officials.

Overall, it looks like tax administration is finally being cleaned up and being made more efficient. It would be interesting to see if there has been as sharp an increase in the number of complaints about harassment by the tax officials.