Nothing dramatic about the Direct Tax Collections!

In the early days of August, major news outlets carried headlines claiming huge growth of tax payers and tax collections, which they attributed to the positive outcomes of the demonetisation. I had done a detailed fact check of the above claim in an article in the wire.

Couple of days back, media reported, yet again, that revenue from the direct tax grew at 17.5% during Apr-Aug period, creating a perception that, there is a quantum leap in our tax collections. This needs to be analysed in detail to understand whether there is anything phenomenal about this growth or is this growth is following the current growth trend.

This year’s union budget's target revenue collection was ₹9.80 lakh crores from direct tax, of which ₹5.39 lakh crores in corporate tax and ₹4.41 lakh crores in income tax. Meanwhile, the direct tax collected during Apr-Aug period is ₹2.24 lakh crores, which is 22.9% of the budget target of direct tax.

During the same period last year, ₹1.89 lakh crores was collected as direct tax, which was 22.3% of the targeted direct tax collections of ₹8.47 lakh crores for that year. So both years, the collections are more or less in the same range of 22-23% of the targeted collections. 

From the following table, it is evident that the direct tax collections from June to August between the last two years are almost in the same range.

This year's direct tax target of ₹9.80 lakh crores is 15.7% more than last year’s target of ₹8.47 lakh crores. Last year’s tax collection shown a year to year growth of 14.54%. For a meaningful comparison, direct tax collections and its year to year growth for last 6 years are given in the graph below. 

Direct tax collections shows a steady year to year growth between 2011-12 to 2013-14, from 10.76% to 14.24%, which of course during UPA 2 under Dr. Manmohan Singh. But it nosedived to 8.96% in 2014-15 and further to 6.63% in 2015-16 during the current NDA regime under Narendra Modi. Then it recovered to a growth of 14.54% in the last year. Also important to note that the recorded 14.54% year to year growth in 2016-17 was based on a shrunken direct tax collection base of 2015-16.

But there are many factors which can be attributed to this recovery in growth viz. the salary revision and arrears given to Central Government employees due to seventh pay commission, income taxes collected under Income Declaration Scheme, Pradhan Mantri Garib Kalyan Yojana (PMGKY), etc, which were collected in the second half of the year. So these collections helped the Government to achieve the target in last year. Even with the above favourable factors, no dramatic jump in the direct tax collections were observed in last year.

Attempting a comparison with the direct tax collections of same period  of last year to claim a growth of 17.5% is nothing but misleading. Except the last installment, which amounts to 50% of the income tax due under IDS-2016 and to be paid before September end, other factors helped to surge the tax collections in the second half of last year but for the current year.

Last year, a collection of 38.65% of the targeted direct tax was recorded in the first half of the year against 45% target set in the budget. So how it will fare this year will be clear when the tax collections for this September is announced. How the slowdown in the economy is going to affect the direct tax collection during this year is lingering as a worrying factor. Only the direct tax collections in the second half of this year will give us a clear picture that whether direct tax met its target or not.

In nutshell:

• The direct tax collections are in line with the normal trend as opposed to any dramatic growth claimed by the media.
• It is prudent to wait till the year end to get the complete picture before jumping to conclusions on the target collection goals based on part data.