India’s economic growth is more even than what most people believe it is if corporate tax collections from tier-II cities are any indication. In an economy that expanded 9.4% in 2006-07, corporate tax collections from many of these cities grew faster than the national average, although better compliance and a stronger tax regulatory regime may have also contributed to this.
Data compiled by the finance ministry shows that in 2006-07, the rate of growth in Jaipur, Hyderabad and Ahmedabad was higher than that in New Delhi and Mumbai. Ranked by collections, New Delhi and Mumbai—which together account for more than 50% of total corporate taxes—are followed by Bangalore, Chennai, Meerut and Hyderabad.
Responding to these trends, the finance ministry has now begun to focus its energies on tier-II cities to meet its annual collection targets of Rs2,67,491 crore in 2007-08—reflecting a growth of 17.22% over the actual receipts in 2006-07.
And the Meerut chief commissionerate’s targeted corporate tax collection in 2007-08 puts it in fourth spot, ahead of traditional big centres such as Chennai and Kolkata.
Meerut’s rise to the fourth spot in the government’s target for the current year, say experts, has been helped by a combination of factors, including the increased incidence of industrial activity in New Delhi’s hinterland, Noida and Ghaziabad, and the presence of state-owned oil exploration company Oil and Natural Gas Corp. Ltd (ONGC) as a tax payer in the region.
“The proximity of Noida and Ghaziabad to Delhi, the relocation of some manufacturing units out of Delhi and into those two regions following a court order have helped,” said G. Srivastava, head (economic policy) at industry lobby Confederation of Indian Industry, on the reasons for Meerut’s importance in corporate tax collections.
Other centres where actual tax collections have increased significantly between 2004-05 and 2006-07 are Hyderabad, Jaipur, Pune and Bhubneswar.
In 2006-07, Hyderabad stood sixth in the direct tax collection list, ahead of Kolkata. Hyderabad’s actual tax collection in 2006-07 was Rs10,132 crore, a little more than Kolkata’s collection of Rs9,806 crore in the same period.
The growth in direct tax collections in these cities over the last three years has increased sharply. According to Gaurav Taneja, partner at audit firm Ernst & Young, the rising tax collections are part of a larger trend of the growing importance of second tier cities, something that has also showed up in consumption patterns.
“If you look at any fast moving consumer goods’ consumption patterns in tier-II and tier-III cities, it is going up dramatically,” he said.
A comprehensive government survey conducted by the National Sample Survey Organisation (NSSO) over 1999-2000 and 2004-05, lists Varanasi, Agra, Bhopal, Indore and Patna as the cities with the most number of self-employed individuals in the country.
A former secretary in the finance ministry, who did not wish to be identified, said an additional factor in rising tax collections was the decision of the revenue department to opt for electronic filing of tax deducted at source (TDS). Since this was mandatory, it led to better compliance, especially in second and third tier cities, he added.
“A subtle, but definite change has taken place in the attitude of taxpayers. This is the single most important reason for growth,” finance minister P. Chidambaram had said on 23 May while addressing a meeting.
The rise of tax collections from tier-II cities is part of larger changes in tax collection patterns across regions. Mumbai and New Delhi currently account for around half of all direct tax collected in India, but the share of other centres could soon increase.
Bangalore, which is third in terms of tax collections, could soon see a marked growth. “Bangalore’s contribution will go up once the tax holiday goes for information technology companies,” said Taneja.
Software firms enjoy a 10-year tax holiday that ends in 2009.