India’s direct tax collection for the financial year (FY) ended March 2021 grew 19.5% year-on-year, the highest rate of growth since FY17. This growth was driven by higher corporate tax collections, which grew by 37.2% compared to the previous year, and personal income tax, which grew by 11.9%. Despite this impressive result, the question of how to sustain this growth rate in the next financial year remains. This report examines the various strategies the government can employ to ensure that direct tax collection continues to grow at a similar rate in FY24. It discusses the need to strengthen the existing tax structures, explore new methods of taxation, and incentivise taxpayers to pay their taxes promptly. It also highlights the importance of tax compliance and emphasizes the need for the government to take a more proactive approach in tackling the issue of tax evasion. By implementing the measures outlined in this report, the government will be able to ensure more consistent and sustainable growth in direct tax collection in the coming financial year.
Current Situation: Direct Tax Collection in FY21
Measures taken by the government to increase direct tax collection in FY21 included higher corporate tax collections, which grew by 37.2% compared to the previous year, and higher personal income tax collections, which rose by 11.9% year-on-year. However, while the growth in personal income tax was driven by a large increase in the share of new taxpayers—who reported an average share of just Rs.10,000 in FY20—the growth in corporate tax was largely driven by the increase in the share of high-tax taxpayers, who reported an average tax of Rs.58 lakh. These high-tax taxpayers reported only Rs.10,000 in FY21, and were therefore unable to contribute much to the overall increase in direct tax collection.
Strategies to Sustain 19.5% Growth in Direct Tax Collection in FY24
Given the government’s ambitious plans to increase direct tax collection from 19.5% in FY21 to 18.7% in FY24, it is important that the government adopts a sustained and effective strategy to increase direct tax collection in FY24. It is useful to examine the factors that contributed to the 19.5% growth in direct tax collection in FY21, and see if any of these factors can be employed to generate even higher growth rates in the coming year. The government has taken several measures to strengthen existing tax structures and improve compliance in order to help achieve the target of 19.5% growth in direct tax collection. One such measure is the introduction of the Goods and Services Tax (GST), which is expected to unify the country’s indirect tax system under a single tax-collection mechanism. The GST is likely to bring down the compliance cost of the existing indirect tax system, which is currently quite high. Another measure that may help increase direct tax collection is the decision to levy an additional surcharge on income tax payers with an income of Rs.10 crore or more per annum. This measure is expected to encourage high-tax taxpayers to come forward and comply with their tax obligations, as they now have an incentive to do so.
Exploring New Methods of Taxation
With the growing use of digital modes of operation, it is inevitable that the government explore new methods of taxation to generate revenue. The government has already initiated a program to encourage digital payments through a platform called e-wallets. Another area that needs exploration is the use of intelligible artificial intelligence-based algorithms to assist tax officials in identifying non-compliant taxpayers. The government is already exploring the use of artificial intelligence to identify income tax evasion. In fact, the Central Board of Direct Taxes has already issued a communication to all its field formations, instructing them to identify taxpayers who evade income tax by submitting annual returns without any tax deducted. The Indian Revenue Service (Customs), after careful consideration, has decided to launch the “Intelligent Tax Identification and Tax Evasion Detection System”, which would help in identifying non-compliant taxpayers. The IRS has received a proposal from the Ministry of Finance on development of a software and has invited policy and technical inputs for its implementation. The Ministry of Finance hopes that the implementation of this system would be completed in the next fiscal year.
Incentivizing Taxpayers to Pay Taxes Promptly
The government has already initiated a program to encourage taxpayers to pay their taxes promptly. Currently, the government levies an interest on late payments of income tax at 8%. The government has, however, decided not to increase the interest on late payments of Central Excise Duty (CED) from 2% to 8% as of now. This will keep the interest on late payments of income tax and CED at 8% and encourage taxpayers to pay their taxes promptly.
Enhancing Tax Compliance
The government has also decided to institute a mechanism to reward taxpayers who comply with the law and provide information on tax evasion. The Income Disclosure Scheme, which allows taxpayers with an undeclared income to pay taxes on the same amount and report it to the authorities, was recently introduced. The government also plans to promote an online system for income tax filing called I-Tax, which would help in strengthening tax compliance. The I-Tax project has been implemented by the National Institute of Public Finance and Policy (NIPFP), which has developed an interactive web-based system for income tax filing.
Direct tax collection is crucial for fiscal health, as it represents the revenue the government receives from individuals and businesses alike. In addition, it is important to note that indirect taxes, such as customs and excise duty, are collected directly by the Central government, while the majority of indirect taxes, such as the GST, are collected by the state governments. As such, the growth in direct tax collection has a direct impact on the fiscal health of the government, as well as the citizens of India. The report examines the various strategies the government can employ to ensure that direct tax collection continues to grow at a similar rate in FY24. It also highlights the importance of tax compliance and emphasizes the need for the government to take a more proactive approach in tackling the issue of tax evasion.