Direct tax collections in India had been growing by more than 25% a year since the financial year 2003-04 with Rs 3.12 lakh crore collected in 2007-08, against collection of just over Rs 1 lakh crore in 03-04. This trend of healthy growth continued up to September 2008 as collections stood at Rs 1.54 lakh crore, up 33%. The adverse effects of global economic slowdown on Indias economy became obvious from October 2008 onwards, leading to a fall in collections. During the next six months (October 2008 to March 2009), advance-tax and self-assessment tax collections fell more than 20%, resulting in overall negative growth of 6.6%.
The fall could be restricted to 6.6% due to positive growth of 6.7% in post-assessment tax collections and of 24.6% in TDS payments. As a result, direct-tax collections for year to March 2009 stood at Rs 3.38 lakh crore, growing at 8.33% whereas indirect tax collections fell by 4.13%. This was partly due to 50% more tax payments made by the banks whereas almost all other sectors had shown negative growth. The success achieved in augmenting TDS collections from government departments, PSUs and from TDS surveys conducted in very large numbers all over the country also contributed significantly to this growth. In addition, more than Rs 26,400 crore were collected out of demand raised in assessments.
The comparative study of growth trends in direct-tax collections and indirect-tax collections makes a very interesting reading. Direct taxGDP ratio had grown from 3.81% in 03-04 to 6.61% in 07-08. This ratio went down only marginally to 6.36% in 2008-09. On the other hand, indirect taxGDP ratio has by and large remained the same, being at 5.39% in 03-04, 5.92% in 07-08 and down to 5.04% in 08-09. The share of direct taxes in total tax collections has also gone up from 36% in 01-02 to 55.8% in 08-09. Therefore, the finance minister will have to rely heavily on direct-taxes to finance the development schemes of the government.
The revival of the economy is expected only by the year-end. The slow GDP growth at present would adversely impact the advance-tax/ self-assessment tax collections. While incomes are likely to go down, the economic activities, including work on various projects and contracts, especially those funded by the government, national /international agencies and MNCs, will go on. Therefore, the I-T department would probably deploy its manpower and resources on augmentation of TDS. The computerised data can be used for generating lists of short-deductors, non-deductors and payment-defaulters. It should be possible to achieve more than 30% growth in TDS collections.
Interestingly, the percentage of post-assessment tax collections out of total tax collections has remained the highest in India, varying between 15% and 9% as compared to less than 8% in any other country (source: OECD data). This is the position even though only less than 2% of tax returns are being scrutinised in India. It would be advisable for the department to concentrate on raising substantial demands by framing quality assessments and thereafter on collecting such tax demands. The planned use of computerised data can facilitate detection, especially of cases making inadmissible claims of exemptions and deductions.