Personal income tax now does the heavy lifting in direct tax collections

In value terms, personal income collections after refunds stood at  ₹10.44 trillion in 2023-24, growing at 25.23%.
In value terms, personal income collections after refunds stood at 10.44 trillion in 2023-24, growing at 25.23%.

Summary

  • Growth, tech-driven tax administration, more individuals in tax net aid collections

For the second year in a row, individual taxpayers have contributed more to the government’s direct tax coffers than businesses, according to data from the Central Board of Direct Taxes (CBDT). What’s more, the wafer-thin gap between the two has significantly widened.

Last fiscal (2023-24), personal income tax accounted for 53.31% of direct tax receipts, against 46.52% from corporate tax collections. In 2022-23, their shares were 50.08% and 49.63%, respectively.

The break-up is in line with countries such as the US, Canada and the UK, where personal income tax contributes more to the exchequer than corporate tax revenue, according to data publicly available from their respective government departments.

The surge in income tax collections

A spokesperson for the CBDT attributed the rise in personal income tax collections to rising income levels, higher use of technology by the government, taxing dividends in the hands of the individual taxpayer instead of the corporate entity, simplification of the Income Tax Act by reducing exemptions and deductions, and simultaneously reducing the tax rates.

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To be sure, the Centre introduced a parallel, new income-tax returns filing regime in 2020, with effect from 2020-21, that reduced exemptions and deductions and lowered the tax rates. While data is not available on how many persons have moved to the new regime since then, the government sweetened the regime in the 2023-24 budget by increasing the tax rebate to 7 lakh from 5 lakh earlier to increase its adoption.

In value terms, personal income collections after refunds stood at 10.44 trillion in 2023-24, growing at 25.23%. On the other hand, corporate tax receipts were 9.11 trillion, backed by growth of 10.26% year-on-year. Comparatively, total indirect tax collections in 2023-24 are expected to be at 14.83 trillion, with a growth of 7%, as per the revised estimates.

Experts attributed the trend to corporate tax rate cut in 2019, shifting dividend distribution tax (DDT) from the company to the shareholder in 2020, buoyant equity markets boosting securities transaction tax (STT) collections (which is included in personal income tax receipts), extensive technology-driven oversight of transactions in the economy by the income tax department, pre-filled income tax returns, e-verification of transactions, and the facility for updating tax returns.

What's behind the rise

Audit and consulting firm EY said in an analysis shared with Mint that higher individual incomes due to economic growth, tech-driven tax administration and more individuals entering the tax net after the 2017 GST (goods and services tax) rollout, which contributed to the economy’s formalization, have aided in personal income tax collection exceeding corporate tax collections.

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“The ideal tax structure varies depending on the economic situation of a country," said Sameer Gupta, national tax leader, EY India. “OECD (Organisation for Economic Co-operation and Development) estimates for tax structures for 2021 indicate that OECD countries rely more on personal income tax and social security contributions (contributing 24% and 26%, respectively, to the total tax collections), whereas corporate income tax collections contributed only 10%."

“Greater formalisation of the economy, reduction in corporate tax rate, and individual income in the highest slab above a threshold getting taxed at a high rate of surcharge have contributed to the uptick in personal income tax collections," said Suranjali Tandon, associate professor at the National Institute of Public Finance and Policy (NIPFP). “With corporate and personal income tax rates already reworked in recent years, the capital gains tax regime could receive policy attention when the government frames a new direct tax code."

The CBDT’s spokesperson added that extensive use of technology by the tax department to collect data of financial transactions from a wide spectrum of third-party reporting entities and making that data available to the taxpayers through the Annual Information Statement (AIS) has contributed in a big way to bolster the personal income tax collections.

The person also attributed the growing personal income tax receipts to prefilling tax return forms with the data captured in the AIS and 26AS statements to assist taxpayers to file tax returns correctly.

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“Expansion of scope of tax deducted at source (TDS) and tax collected at source (TCS) provisions by bringing in several payments including on virtual digital assets, perquisites, remittances under liberalized remittance scheme, gaming, etc. under the ambit of TDS/TCS has led to a substantial increase in the number of unique deductees/ collectees resulting in increased personal income tax collections," the spokesperson added.

The CBDT also considers that easing the compliance requirements, increased linking of information with other revenue agencies including the Central Board of Indirect Taxes and Customs (CBIC), and various steps taken to build trust between the department and the taxpayer have helped in the robust growth of personal income tax collection.

“In the Indian context, corporate tax collections have been improving and contributed 26.8% in FY24 to the total tax collections, as per the revised estimates. With government’s continued efforts to broaden the tax base and other tax reforms, corporate tax collections should see a further rise," said Gupta of EY.

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