Direct Tax Collection

30th November, 2021 Economy

Context:

The net direct tax collection grew almost 68% during the April 1-November 23 period to more than ₹6.92 lakh crore.

Details:

The net collection between April 1 - November 23 in 2020-21 and 2019-20 fiscals was more than ₹4.12 lakh crore and over ₹5.44 lakh crore.
The gross direct tax collection (before adjusting refunds) as of November 23 stood at more than ₹8.15 lakh crore, a 48.11% growth over collections a year earlier.

Comparison of Direct and Indirect Taxes

There are different implications of direct and indirect taxes on the country. However, both types of taxes are important for the government as taxes include the major part of revenue for the government.

Direct Taxes	Indirect Taxes
It is levied on income and activities conducted.	It is levied on product or services.
The burden of tax cannot be shifted in case of direct tax.	The burden of tax shifted for indirect taxes.
It is paid directly by person concerned.	It is paid by one person but he recovers the same from another person i.e. person who actually bear the tax ultimate consumer.
It is paid after the income reaches in the hands of the taxpayer	It is paid before goods/service reaches the taxpayer.
Tax collection is difficult.	Tax collection is relatively easier.
Example Income tax, wealth tax etc.	Example GST, excise duty custom duty sale tax service tax

Type of Direct Taxes:

Direct tax issue:

Gross tax-to-GDP which was 11% in FY19, fell to 9.9% in FY20 and marginally improved to 10.2% in FY21 (partly due to decline in GDP) and is envisaged to be 10.8% in FY22.
India’s tax-to-GDP ratio, the universal measure for a state’s revenue-raising ability, for centre and states combined was 17.1% in 2018-19, lower than the average of its emerging market peers (20.9%).
Crucially, India is more reliant on indirect taxes (taxes on spending) instead of direct taxes (taxes on income) compared to its peers.
Since direct taxes are taxed on income, they are more progressive and hurt the poor less. But the direct tax share in India's tax collections has shrunk as overall tax revenues have fallen.

Reasons for Low tax to GDP ratio:

"Generous" government policy
Tax exemption raj that benefited the richer private sector.
India has relatively large informal/unorganised sector, and tax evasion is more rampant in informal sector compare to organised sector. Low per capita income, high poverty, keeps tax collections low.
Out of 25 crore households in India, 15 crore belong to agricultural sector which are exempted from taxes.
A parallel economy of unaccounted incomes and expenditures exists which goes untaxed.
India has one of the highest numbers of disputes between tax administration and taxpayers, with lowest proportion of recovery of tax arrears.
India’s direct to indirect tax ratio is roughly 35:65. This is in contrast to most OECD economies where the ratio is the exact opposite, 67:33 in favour of direct taxes.

Government Initiatives to Improve Direct Taxes:

Personal Income Tax - In order to reform Personal Income Tax, the Finance Act, 2020 has provided an option to individuals and co-operatives for paying income-tax at concessional rates if they do not avail specified exemption and incentive.
Abolition of Dividend Distribution Tax (DDT) - the Finance Act, 2020 removed the Dividend Distribution Tax under which the companies are not required to pay DDT with effect from 01.04.2020. The dividend income shall be taxed only in the hands of the recipients at their applicable rate.
Vivad se Vishwas- Direct Tax Vivad se Vishwas Act, 2020 was enacted on 17th March, 2020 under which the declarations for settling disputes are currently being filed.
Faceless E-assessment Scheme- It provides for a new scheme for making assessment by eliminating the interface between the Assessing Officer and the assessee, optimizing use of resources through functional specialization and introducing the team-based assessment.
Faceless appeals –It empoweredthe Central Government to notify Faceless Appeal Scheme in the appellate function of the department between the appellant and the Commissioner of Income-tax (Appeals).
Document Identification Number (DIN) - In order to bring efficiency and transparency in the functioning of the Income Tax Department, every communication of the Department whether it is related to assessment, appeals, investigation, penalty and rectification, among other things, issued from 1st October, 2019 onwards are mandatorily having a computer-generated unique document identification number (DIN).
Pre-filling of Income-tax Returns- In order to make tax compliance more convenient, pre-filled Income Tax Returns (ITR) have been provided to individual taxpayers.
Encouraging digital transactions- In order to facilitate the digitalisation of the economy and reduce unaccounted transactions, various measures have been taken which include reduction in rate of presumptive profit on digital turnover, removal of MDR charges on prescribed modes of transactions, reducing the threshold for cash transactions, prohibition of certain cash transactions, etc.
Simplification of compliance norms for Start-ups- Start-ups have been provided hassle-free tax environment which includes simplification of assessment procedure, exemptions from Angel-tax, constitution of dedicated start-up cell etc.
Relaxation in the norms for Prosecution:The threshold for launching prosecution has been substantially increased. A system of collegium of senior officers for sanction of prosecution has been introduced. The norms for compounding have also been relaxed.
Raising of monetary limit for filing of appeal- To effectively reduce taxpayer grievances/ litigation and help the Income Tax Department focus on litigation involving complex legal issues and high tax effect, the monetary thresholds for filing of departmental appeals have been raised from Rs. 20 lakh to Rs. 50 lakh for appeal before ITAT, from Rs. 50 lakh to Rs. 1 crore for appeal before the High Court and from Rs. 1 crore to Rs. 2 crore for appeal before the Supreme Court.
Expansion of scope of TDS/TCS- For widening the tax base, several new transactions were brought into the ambit of Tax Deduction at Source (TDS) and Tax Collection at Source (TCS). These transactions include huge cash withdrawal, foreign remittance, purchase of luxury car, e-commerce participants, sale of goods, acquisition of immovable property, etc.