Overview of Direct Tax Collections
Recent data indicates a decline in direct tax collections up to June 19, with net collections reported to be 1.39% lower than the previous financial year. This decline is largely attributed to a reduction in corporation tax collections.
Trends in Major Taxes
- Corporate Income Tax (CIT): The annual growth rate has decreased from 15% in 2022–23 to 8% in 2024–25.
- Central Goods and Services Tax (CGST): Growth fell from 21% to 10% during the same period.
- Personal Income Tax (PIT): Showed better performance with growth rates of 20% and 17% respectively.
Quarterly Tax-to-GDP Ratios
- Corporation Tax Collections: Display volatility, fluctuating around 3% of GDP.
- Personal Income Tax: Shows an upward trend with some seasonal fluctuations.
- Central GST: A modest increase with a clear moderation in recent quarters.
Influencing Factors
- The majority of reported income is from salary incomes (53.9%) and business incomes (29.7%).
- WTW Salary Budget Planning Report indicates steady salary growth: 8.5% in 2021, 9.8% in 2022, 10% in 2023, and 9.5% in 2024 and 2025.
Impact of GST Introduction
The introduction of GST led to the formalization of economic activities, improving revenue collections. However, as this transition completes, the stimulus for high growth in revenue may taper off. Business income has been increasing at about 12-13% from AY 2021-22 to AY 2023-24, aligning with GST trends.
Emerging Challenges
- Global Economic Uncertainty: Tariff changes and geopolitical tensions, such as the Israel-Iran conflict, impact demand and supply chains.
- Inflation and Monetary Policy: The RBI's reduction in repo rate and cash reserve ratio aims to boost investment, but inflation changes could alter this strategy.
- Policy Initiatives: Government schemes like free food and healthcare are expected to stimulate demand but have not shown a significant impact on GST revenues.
- Tax Regime Changes: The increased exemption threshold and divergence between old and new regimes likely reduce individual income tax collections.
The moderation in the growth of PIT seems likely due to these combined factors.
