India's Direct Tax Collection: Exploring the Diverging Trends

India's economic trajectory in recent years has been marked by significant milestones, with direct tax collections standing out as a pivotal indicator of the nation's financial progress. Despite global economic uncertainties and domestic challenges, India has demonstrated robust growth in its direct tax revenue.

In India, Direct taxes can broadly be classified into:

• Personal Income Tax: Charged on the income of individuals and entities.
• Corporate Income Tax: Levied on the profits of corporations.

The Income Tax Department, under the Ministry of Finance, is responsible for the collection and administration of direct taxes in India.

Direct tax collection over the years

Source: Press information bureau

The chart depicts India's direct tax collection increasing from US$ 119.8 billion in FY18 to US$ 225.9 billion in FY24. There was a notable decline in FY20 and FY21 due to COVID-19, followed by a robust recovery in FY22 with a 41% growth, and continued steady growth in subsequent years, reflecting sustained positive momentum in fiscal growth. This trend indicates a strong and growing financial environment, making it an appealing opportunity for prospective investors.

Personal income tax collections exceed corporate income tax collection

Source: Press information bureau

Over time, there has been a clear transition in the breakdown of India's direct tax revenues, moving from Corporate Income Tax (CIT) to Personal Income Tax (PIT). Traditionally, CIT used to dominate the direct tax revenue pie. However, in the recent years we witnessed that PIT collection has exceeded CIT, as per the data from Income Tax department.

Several factors have contributed to the surge in direct tax collections in India

• Economic Reforms and Digitalisation: The primary focus of the government has been on implementing economic reforms. These include Goods and Services Tax (GST), Insolvency and Bankruptcy Code (IBC) implementation, and lowering corporate tax rates; all these have witnessed significant increase in business confidence and compliance levels. Moreover, digitalizing tax administration through e-filing of returns, faceless assessment system simplified processes, minimized tax evasion among other benefits noted earlier. Introduction to reduce human interface, this system ensures transparency and minimizes discretion, thus encouraging compliance and reducing corruption.
• Broadened Tax Base: Growing awareness among people, simplification of procedures for filing returns and strict actions against non-compliance have contributed to increasing the number of individual assesses. For example: 6.77 crore ITRs were filed for AY24 as against 5.83 crore ITRs filed for AY23 which is marking a YoY growth of 16.1%, widening the tax base.
• Rise in personal income: The direct tax collection increased with the increase in personal income in India where high incomes lead to individuals moving up into higher tax brackets consequently contributing more towards the revenue received by the government.
• Government Initiatives and Compliance: The Pradhan Mantri Garib Kalyan Yojana (PMGKY) had provisions wherein a person can state their undisclosed income without inviting any legal charges and could pay tax on remaining unaccounted money at 49.9% rate. Likewise, the Black Money (Undisclosed Foreign Income and Assets) Act 2015 has played a role in decreasing instances of tax evasion and enhancing compliance. Consequently, government conducts numerous programs aimed at educating people on need to file returns as well as becoming tax compliant. Simpler and user-friendly version of ITR forms has been introduced in order to facilitate the process of filing them.
  
  Vivad se Vishwas scheme was announced in the Budget 2020. This scheme helps to increase direct tax collection by offering taxpayers a simplified dispute resolution mechanism, reducing litigation and encouraging timely settlement of tax disputes, thereby enhancing revenue collection and improving compliance.
  
  It is in light of these initiatives this that there have been various schemes assuring higher direct tax collection by way of expanding ITR registrations across India’s populace.
• Reduction in Corporate Taxes: The move by the Indian Government is also aimed at attracting more investments into its economy hence making its firms competitive globally by reducing corporate taxes. As an illustration, during 2019 fiscal year, there was a reduction on existing companies’ basic corporate taxes rate to 22% (effective 25.17% with surcharge and cess), while new manufacturing entities created after October 1st, 2019, were taxed at a rate of 15.0% (effective 17.2%). These lowered rates therefore mean that compared to before, companies can pay lower taxes effectively.

Positive implications for India's economy

• Enhanced Fiscal Health: The government’s fiscal position is strengthened by increased tax revenues; these, in turn, result in an increase in public investments within infrastructure, health care, education and social safety nets. It also stimulates economic growth and development.
• Reduction in Fiscal Deficit: When the direct tax revenue increases, it helps reduce fiscal deficit that is necessary for macroeconomic stability. Similarly, it reduces crowding-out effects of government borrowing, leading to low fiscal deficits and stable interest rates. A lower fiscal deficit target of 4.9% was announced by the government during the Budget 2024-25 and the government looks to bring down this figure further to 4.5% for 2025-26.
• Investment in Infrastructure: Huge collections from taxes provide the government with enough financial muscle to invest heavily into critical infrastructure projects thereby stimulating economic activities and generating employment opportunities because of that. Some of those are exemplified with great funding allocations directed towards Bharatmala Pariyojana (road and highways construction program) or Sagarmala Programme (focused on port-development).
• Social Sector Spending: Higher tax revenues enable increased spending on social sectors such as healthcare and education. The government's flagship schemes like Ayushman Bharat (health insurance for the poor) and the National Education Policy (NEP) 2020 aim to improve the quality of life and human capital development, which are essential for long-term economic growth.

Challenges and the way forward

Despite improving trends in widening of tax base and increasing tax collections, evasion and avoidance have remained. Consequently, using methods such as AI and data analytics for stricter enforcement can address this concern. Furthermore, direct tax collections can be enhanced by increasing the number of taxpayers. Simplifying taxation procedures and rules can make compliance easier, thus making more people to participate willingly. These steps will also ensure that revenue from taxes does not wane.