Centre's indirect tax share in GDP rises in FY21 after four years

Share of corporation tax collections in gross tax revenue falls to 10-year low

After a gap of four years, the contribution of the Centre’s indirect taxes in gross domestic product (GDP) has exceeded that of direct taxes, underscoring the regressive taxation system in the county.
 
The share of direct tax in GDP fell to a 15-year low in 2020-21 (FY21) at 4.79 per cent, while that of indirect taxes grew to a four-year high of 5.48 per cent.
 
The increase in indirect taxes was primarily due to a 63 per cent year-on-year (YoY) jump in excise duty collections to Rs 3.89 trillion and a 23-per cent YoY increase in Customs duty to Rs 1.35 trillion.
 
On the other hand, corporation tax posted an 18 per cent decline in collection and its share in gross tax revenue fell to at least a 10-year low of 22.5 per cent.
 
Both the excise duty on petrol and Customs duty on gold pinched the common man further. The share of excise duty rose sharply to 19.2 per cent in gross tax revenue, from 11.9 per cent in 2019-20 (FY20)  and 11.1 per cent in 2018-19.
 
“People at the bottom of the pyramid don’t have much savings, and whatever they’re earning is getting taxed in indirect taxation. If the share of indirect tax increases, it’s regressive for an economy,” said Devendra Pant, chief economist at India Ratings & Research.
 
Progressive taxation entails higher revenue from taxation on income rather than taxation on consumption, but in the Indian context, where a lot of incomes are outside the income-tax (I-T) net, there is little choice but to focus on revenue through indirect taxation, said Aditi Nayar, chief economist at ICRA.

 
The total direct tax collected in FY21 was Rs 9.47 trillion, reversing the earlier trend of corporate tax collections being higher than income tax.
 
Corporation tax collected was Rs 4.57 trillion, while I-T mop-up was Rs 4.69 trillion.  Developed countries have a higher contribution of direct tax in their GDP.
 
The fall in corporate tax is due to the slowdown in the first half of FY21, and a cut in corporate tax rates, observed Nayar.
 
On the other hand, better indirect tax collection has been due to the increase in excise duty on fuel and a high Customs duty collection on gold.
 
Pronab Sen, former chief statistician of India and country director, International Growth Centre, said while a few listed corporates may have shown increase in profits, a lot of non-listed corporates are struggling since they have used up a lot of money to pay their bills. He added that direct taxes are more progressive in a tax system as indirect taxes are also paid by the poor.
 
Gross tax revenue grew 0.73 per cent in FY21, exceeding the revised Budget target by Rs 1.24 trillion. In the previous year, gross tax revenue posted a 3.39-per cent decline.
 
Centre’s tax-to-GDP ratio improved to 10.25 per cent after touching a decadal low of 9.88 per cent in FY20 - the pre-Covid year.
 
Lower tax-to-GDP ratio constrains the government’s capital spending as it puts pressure on the fiscal deficit.
 
Former finance minister Arun Jaitley had in a social media post in 2018 emphasised on the need to improve India’s tax-GDP ratio by another 1.5 percentage point. The tax-to-GDP ratio had touched a high of 11.3 per cent in 2017-18.
 
In the steepest hike in taxes on petrol and diesel, the Centre had in May last year increased the road and infrastructure cess by Rs 8 each for petrol and diesel and a special additional excise duty was hiked by Rs 2 per litre and Rs 5 per litre, respectively.
 
The entire hike went to the Centre’s coffers and was not devolved to states.The FY22 Budget also imposed an agriculture infrastructure and development cess of Rs 2.5 per litre on petrol and Rs 4 per litre on diesel. In the case of goods and services tax, it tightened compliance through enforcement, including the introduction of e-invoicing.