Covid, lower rates push corporate tax collections below personal income tax for first time in years

Representative image | Dhiraj Singh | Bloomberg

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New Delhi: Corporate tax collections fell below personal income tax in the past fiscal year – for the first time in years – due to the negative fallout from the Covid-19 on businesses as well as the lower tax rates that went into effect two years ago.

Corporate tax collections levied on corporate profits fell by 18% in 2020-2021, while personal income tax collections fell only 2.3%.

Data released by the Comptroller General showed that corporate income tax collections were Rs 4.57 lakh crore and personal income tax at Rs 4.69 lakh crore in 2020 -2021.

Graphic: Ramandeep Kaur / ThePrint
Graphic: Ramandeep Kaur / ThePrint

While corporation tax is levied on corporate profits, income tax is levied on personal income.

After coming to power for a second term, the Narendra Modi government cut corporate tax rates in September 2019 by around 10 percentage points. Effective tax rates have been reduced to around 25 percent for existing businesses and to around 17 percent for new businesses in the manufacturing sector.

Read also : Moody’s sets India’s GDP growth at 9.3% for current fiscal year, 7.9% for fiscal 23

Factors that affected collection

NR Bhanumurthy, vice-chancellor of Dr BR Ambedkar School of Economics University in Bengaluru, said a combination of factors could explain the decline in corporate tax collections in 2020-2021.

“A reduction in tax rates and a contraction in GDP due to the pandemic could explain the decline in corporate tax collections,” he said.

Even though the manufacturing sector was able to resume operations after the first months of lockdown in 2020, the service sector is still struggling and is either completely shut down or operating at reduced capacity.

This has had a negative impact on the profitability of companies in sectors such as civil aviation, entertainment and hospitality. Many small businesses have also reportedly closed due to the pandemic.

Bhanumurthy pointed out that the resilience seen in personal income tax collections could be due to better reporting of all income and possibly higher dividend payouts by companies in the absence of corporate activity. investment.

“Profits are used for expansion activities and for dividends. But when future demand is uncertain, companies may have paid higher dividends to shareholders, resulting in increased personal income. Better reporting of income in forms such as 26AS may also have contributed to the increase in personal income tax, ”he said.

Decrease in the last two years

Due to the sharp reduction in tax rates as well as the economic downturn, corporate tax collections have declined over the past two years after peaking at Rs 6.6 lakh crore in 2018-19.

Corporate tax collections fell by 16% in 2019-2020, then by 18% in 2020-2021. Collections have actually fallen by more than 31% from levels seen in 2018-19.
Business tax returns also support this trend.

Almost 15 lakh tax returns were filed by companies in 2020-2021 for income earned the previous year. However, only 13% of these returns were for income brackets above Rs 5 lakh. The remaining 87 percent of returns were for earnings of up to Rs 5 lakh.

In contrast, over 13 lakh returns were filed in 2019-2020 (for income earned in 2018-19), with 18% of the returns being for income brackets above Rs 5 lakh. The remaining 82 percent were returns. filed for income up to Rs 5 lakh.

Read also : The economic impact of the second wave of Covid will not be significant, according to CEA KV Subramanian

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