Surge in Direct Tax Collections and Tax Elasticity

According to data from the Direct Tax Collections for the Financial Year 2022–23 as of mid–June, net collections increased by 45% from the prior year. Corporation tax has the highest percentage of the total amount of Net Direct Tax collected, followed by Personal Income Tax (PIT), which includes Security Transaction Tax (STT), and other taxes.

Corporation Tax receipts of 74,356 crores and Personal Income Tax receipts, which comprise the Security Transaction Tax of 1.11 lakh crore, make up the direct receipts from April 1 to June 15. Over the same time the previous year, revenues totaled 92,762 crores.

Direct Tax Collection

India collected more direct taxes during the current fiscal year than expected and above pre-pandemic levels. The Finance Ministry said that the net direct tax collection for FY22 increased 48.4% over FY21 and 42.5% over FY20. According to the statement, it is 34.96% greater than in FY19, before the epidemic began. The amount is higher than both the budget’s and the revised estimate’s respective projections of Rs. 11.08 lakh crore and Rs. 12.50 lakh crore. As the bank continues to update its data, the numbers are anticipated to rise. Additionally, the amount of advance tax collected increased by 40.75% over FY21, 50.56% over the same time in FY20, and 30.82% over FY19.

Surge in Direct Tax Collections

• It also comprises personal income tax receipts, which include the Security Transaction tax of Rs. 1.11 lakh crore and Corporation tax receipts of Rs. 74,356 crores.
• Strong exports and the continuing numerous industrial and building operations are two factors that contributed to the increase in direct tax collection.
• The first quarter of 2021–2022 is predicted to have double-digit GDP (Gross Domestic Product) growth.

Direct Tax

A direct tax is one whose burden cannot be transferred to another party and is directly borne by the person upon whom it is levied. It is taken out of a taxpayer’s income at the source. For instance: Because the individual whose income is subject to tax is required to pay the tax directly to the government and face the financial burden of the tax, income tax is a direct tax. Other instances of direct tax include:-

Corporation Tax

• The net income or profit that businesses produce from their operations is subject to a direct tax known as corporation tax.
• Corporation tax is due by all Indian companies, public and private, that are established under the Companies Act of 1956.
• By the rules of the Income Tax Act of 1961, this tax is assessed at a certain rate.
• India lowered its corporation tax rates in September 2019 for both new and existing businesses, from 25% to 15% and 22%, respectively, from 30%.
• The effective tax rate for already operating businesses is now 25.17%, down from 35% when a surcharge and cess are included.

Security Transaction Tax

• It is a direct tax imposed on the acquisition and disposal of shares listed on India’s official stock exchanges.
• Both the buyer and the seller must contribute 0.1% of the share’s value as STT.

Dividend Distribution Tax

• Dividends are payments made from a company’s profits to its shareholders.
• As a result, one kind of tax, known as the split distribution tax, is due on the dividends the firm offers its shareholders.
• The DDT was removed from the tax paid by the dividend payer in the Union Budget for 2020–2021. Instead, dividends would be taxed in the hands of shareholders of the distributing firm starting in April 2021.
• The suggested rate is 20% for dividends given to overseas investors and 10% for stockholders who are Indian citizens.

Government Initiatives to Improve Direct Taxes

• For Personal Income Tax: If they do not take advantage of certain exemptions and incentives, individuals and cooperatives have the option under the Finance Act of 2020 to pay income tax at reduced rates.
• Vivad se Vishwas Act 2020: Declarations are now being submitted under Vivad se Vishwas to resolve outstanding tax issues. In addition to helping the taxpayers by bringing down escalating litigation expenses, this will assist the government by earning timely money.
• Tax Deduction at Source (TDS) and Tax Collection at Source (TCS) was expanded to include a wider range of transactions to increase the tax base. These transactions include large cash withdrawals, international transfers, the purchase of luxury vehicles, the selling of items by e-*-commerce participants, the purchase of the real estate, etc.

Why Tax Collection is up?

• The government attributed it to more stringent technology-based enforcement and compliance, including implementing the Annual Information Statement (IAS) last year.
• An overview of all financial transactions made throughout a financial year, including interest, dividends, transactions involving securities, mutual fund transactions, and international remittances, is provided to a taxpayer by AIS.
• Because of this, the amount of self-assessment tax, which is a type of personal income tax, increased by 255% to Rs. 43,500 crores from January to July.
• Recent Q1 results season revealed that owing to pent-up demand, most corporations produced larger profits, which resulted in higher advance taxes.
• After the pandemic, the services sector has also seen tremendous development and job growth, which may help to explain the pattern of tax growth.
• For transactions totaling more than Rs. 10,000, the government instituted a 1% TDS on virtual digital assets as of July 1 of this year.

Tax Elasticity

Tax elasticity, which is frequently measured by GDP, assesses the direct response of tax receipts to changes in the national income (or of tax revenue components to changes in parts of GDP). Simply said, tax elasticity shows how sensitive tax revenue is to changes in the chosen base measure over time. When assessing tax elasticity, tax rates, tax bases, and the effectiveness of revenue collection are not taken into consideration. The effects of changes in the levels of the underlying reference series are all that is taken into account by tax elasticity, not the consequences of changes in the tax structure.

Principles of Tax Elasticity

• At higher rates, tax elasticity is expected to be more common. This implies that the tax base is not adversely impacted when tax rates are initially raised. But if rates rise, it’s easier to see how the tax rate will be negatively impacted.
• In the long run, the flexibility of tax rates is more apparent. This indicates that the effects are not as severe if taxes are temporarily raised by the government to generate some quick cash.

Important Terms

• Inelastic taxes: These taxes have tax bases that are relatively insensitive to changes in tax rates. Taxes imposed on sinful products like cigarettes and alcohol typically fall under this heading. Increasing the tax rate increases tax revenue because the demand for these goods remains mostly unchanged.
• Unitary Elastic Taxes: There are no such things as unitary elastic taxes. The percentage change in the tax rate is exactly equal to the percentage change in the tax base under unitary elastic taxes. For instance, a 10% increase in tax rates will result in a 10% reduction in the tax base. The tax revenue is unaltered since it is the sum of the tax rate and the tax base. A drop in one exactly counterbalances a gain in the other.

Conclusion

Taxes were once used to fund the ruling classes, assemble armies, and erect defences. Taxation became extremely crucial for the country’s economic and social growth when nation-states evolved. It gives the government the resources it needs to offer the people products and services. India has made extensive changes in the areas of direct and indirect taxes, yet despite this, the country still has a low tax-to-GDP ratio, indicating that most people do not pay their fair share of taxes. As a result, more tax measures, such as tax simplification and technology adoption, are required to promote societal tax compliance.

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• Types of Tax
• Widening of Tax Base
• Objectives and Principles of Taxation
• Old Tax Regime Vs New Tax Regime