In a turn of events that has upended the norm in India’s fiscal landscape, personal income tax collections outpaced corporate tax revenues for the first time in over a decade. Data from the central government’s accounts for the financial year 2020-21, released this Monday, shed light on this tectonic shift.
A closer inspection reveals two distinct trajectories: a notably resilient personal income tax graph and a receding corporate tax curve.
Deciphering the Tax Trends
Over the years, these two revenue streams, which are significant contributors to the government’s coffers, have generally moved in tandem. However, the fiscal year 2020-21 has seen an unprecedented divergence. While the income tax collection for this period stood at a resilient ₹4.69 trillion, corporate tax revenues fell significantly to ₹4.57 trillion, making it ₹12,000 crore less than the personal income tax.
Personal income tax, a key component of the Indian tax structure, is levied on the income of individuals and Hindu Undivided Families (HUFs). Meanwhile, corporate tax, another significant source of government revenue, is charged on the profits generated by companies.
Exploring the Reasons behind the Shift
The shift from the usual pattern is noteworthy and prompts a deeper examination. In 2020-21, corporate tax collections experienced a substantial 17.9% drop from the previous fiscal year’s figure of ₹5.57 trillion. In contrast, income tax collections showed a comparatively lesser decrease of just 2.3% from the 2019-20 financial year.
A multitude of factors have contributed to this shift in India’s tax structure. The fiscal year 2020-21 was marked by severe economic turbulence induced by the COVID-19 pandemic. This led to lower profitability for companies, thus translating into reduced corporate tax collections.
On the other hand, the income tax segment demonstrated remarkable resilience. This resilience could be partly attributed to the fact that personal income tax is more broadly distributed across various income segments, reducing the overall impact of the economic downturn. Additionally, the government’s initiatives to expand the tax base and improve compliance might have played a role in the buoyancy of personal income tax collections.
While the shift may be attributable to these immediate circumstances, it’s also worth noting that structural changes over the years may have contributed. Over the past few years, the government has gradually reduced corporate tax rates to spur economic growth and attract investment, which could have had a dampening effect on corporate tax collections.
Moreover, the introduction of measures to incentivize compliance, streamline taxation processes, and bring more individuals under the tax net have likely boosted personal income tax collections. These reforms, along with other demographic and economic shifts, may have gradually shifted the balance between personal income and corporate tax collections.
This unexpected crossover of personal income tax surpassing corporate tax collections is a complex phenomenon. It’s the result of a combination of immediate economic impacts, policy decisions, and longer-term structural changes. As the Indian economy navigates the recovery phase, it will be fascinating to see how these trends evolve and what they mean for the country’s fiscal dynamics.