InvestorQ : Do you see the COVID-19 pandemic impacting the direct tax collections in India in a significant manner and what is the extent of impact that you see?
Sam Eswaran made post

Do you see the COVID-19 pandemic impacting the direct tax collections in India in a significant manner and what is the extent of impact that you see?

swati Bakhda answered.
2 years ago

While the impact will be limited in the current year due to the COVID-19 striking end of the year, the impact will be much bigger in FY21. There is a shortfall of direct taxes in India for fiscal 2020 to the tune of Rs.150,000 crore compared to the revised estimates (RE). That means; the shortfall is much bigger in terms of the original estimates. This is set to take place for the first time in at least two decades, derailing the government’s fiscal deficit goals. Here is what you need to know about the partial impact this year.

· The income tax department estimates total collection to be between Rs.10.5 trillion and Rs.10.7 trillion against the revised target of Rs.11.7 trillion. The final figure may be nearly Rs. 3 trillion short of the original estimates.

· Tax officials have currently attributed the acute shortfall to the global pandemic. But even the earlier months of the year had turned out to be bad for direct tax collection. So the impact of the pandemic this year may be partial rather than total. But next year could post a bigger problem.

· The much touted Vivad se Vishwas scheme, which was expected to give a boost to collections, had not seen a single big entry so far. Since the scheme has been pushed to June, people are likely to come forward only after the lockdown is lifted.

· It may be recollected that the government had set direct tax collection target of Rs.13.5 trillion for the current financial year ( 2019-20). That was scaled down by Rs.2 trillion in the revised estimates. Despite that the direct tax shortfall likely to be at 20-year high. That was more because, during the year businesses and corporates witnessed significant decline in demand. This led to job losses and cut in the investment targets.

· The fall in direct tax collections, to be fair, can also be attributed to the revised corporate tax structure coupled with the Covid-19 outbreak has worsened the situation. The government had to revise the BE downwards to Rs.11.7 trillion in RE on account of reduction in the corporation tax rates. The tax cuts are expected to hit the exchequer by Rs.1.45 trillion and slow down the economy. According to official figures, the tax office managed to garner Rs.9.57 trillion till March 18, a decline of 5.3 per cent over the corresponding period in the previous year.

· Tax department started making efforts after seeing a drop in the third quarter (October-December) advance tax collection payment. In the December quarter, corporation tax mop-up dropped by 5%. In the fourth quarter ( January-March), advance tax payment by corporates further slipped to 10 per cent. The shortfall may widen the Centre’s fiscal deficit, which is pegged at 3.8 per cent of GDP in the current financial year, said a government source. Some are pegging it at close to 4.5% for FY20 and nearly 6.2% for FY21.

· Fiscal deficit surpassed the budget target for FY20 by 28.5% in absolute terms by January itself. However, the focus of the government has not been on the economic situation but to arrest Covid-19 outbreak. That has largely halted every activity and eroded billions. This impact will also be felt in the Tax experts, too, feel that the priority is not fiscal math but to contain spread of the global outbreak.

In short, the impact on FY20 is already visible and FY21 could only be worse.