India’s tax share appears to have gone through an unpretentious change with a sharp drop in the direct tax collections due to the disproportionate impact of the COVID-19 carnage on incomes. The portion of indirect taxes, which mostly include a levy on goods and services as well as import duty, has risen while that of direct taxes – comprised of corporate and individual income tax – has gone down in 2020.
“In a pandemic like this where the economy has been impacted, any large-scale changes impact direct taxes more severely, whereas indirect tax collection is mostly proportional to business turnover and compliance.
In a situation like this where the economy has been impacted and we are on the recovery path, the direct taxes are impacted more severely because the profitability of a company is not directly proportional to the turnover always. If your turnover reduces below a certain benchmark then the profit will not merely reduce, but it may get into a negative zone and therefore the company may not pay any income tax as it will be into a loss. Similarly, when we are in a recovery phase, the companies will take a longer time to come into the profitable zone to pay income tax. In the case of indirect tax, it is more or less proportional to the business volume and turnover and compliance”, said Ajay Bhushan Pandey in a recent interview.
While the government has formally not released direct and indirect tax collections, industry sources said the portion of indirect taxes in overall tax collections rose to around 56 percent, the highest in 10 years for the period. This follows a sharp 26-27 percent decrease in the direct tax collections. Direct taxes are an immediate result of income levels while indirect taxes are generally driven by consumption as demand for certain goods is inelastic either due to they being fundamental in nature or not substitutable like petroleum and diesel.
Excise collections rose in 2020 after the government raised the tax on petroleum and diesel by Rs 13 and Rs 10 per liter, separately. Customs collections, which reflect duty paid on goods imported, grew substantially in November and December. While the revenue in December was up 94 percent to Rs 16,157 crore, in November it was up 43 percent to Rs 11,598 crore.
The havoc wrecked by the pandemic on tax collections – that is an impression of the economic well-being of a country – prompted the primary significant standoff between the Center and the states since the usage of the GST system three years ago. The sharp decrease in GST collections has prompted Rs 1.80 lakh crore shortfall in GST incomes on states. This incorporates Rs 1.10 lakh crore revenue loss by virtue of GST execution and Rs 70,000 crore on account of the pandemic. GST collections, which along with excise and customs duties from part of indirect tax, appeared to have settled over Rs 1 lakh crore mark towards the year’s end as the economy reflated and contacted an unequaled high of over Rs 1.15 lakh crore in December. In any case, by then the pandemic had left its permanent imprint.
The pattern in GST collections during the next two months would show the degree to which the collection targets are probably going to be fulfilled. The shortfall in the collections during the underlying piece of the current fiscal because of the countrywide lockdown is critical and would have an orientation on the fiscal deficit numbers. Apparently, the share of indirect tax will increase in the overall tax collections this year. This is on the grounds that for the most part, the shortage in indirect tax collections is essentially less when compared with the shortfall in the direct tax collections.
The government took many steps during 2020 including bringing a debate goal to bringing a dispute resolution scheme, introducing faceless assessment, equalization levy on e-commerce supply or services, supplanting Form 26AS by Annual Information Statement. With over Rs 9 lakh crore locked up in disputes, the Budget declared the Vivad Se Vishwas plot via which debates could be chosen a payment of tax which is under litigation along with complete waiver from interest and punishment and insusceptibility from arraignment. The plan earned over Rs 72,000 crore till mid-November.
Faceless Assessment and appeals have brought a change in perspective from the prior face-to-face scrutiny assessment and appeals procedure and are pointed toward guaranteeing no personal interface between the taxpayer and the assessee. Taxability of dividends in India went through a significant upgrade during the year with Finance Act 2020 abrogating Dividend Distribution Tax (DDT) payable by domestic organizations on the declaration of the dividend and once again introducing the regime of taxation of dividends in the hands of shareholders.
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