India’s tax burden shifted from boardrooms to petrol pumps during Covid-19
On a year-on-year basis, corporation tax collections saw the biggest decline, whereas Union excise duties had the biggest jump. Union excise duty is the only tax head where actual collections have surpassed even the budget estimates in the Union Budget
The provisional Gross Tax Revenue (GTR) collection of the Union government was ₹20.24 lakh crore in 2020-21. This is slightly more than the ₹20.1 lakh crore which was collected in 2019-20. India’s nominal GDP suffered an annual contraction of 3% in 2020-21. That the Union government managed to increase its revenue collections despite a fall in GDP is an impressive statistic.
An HT analysis shows that this otherwise impressive feat was achieved by disproportionately shifting the tax burden on the poor. In fact, the corporate sector today contributes the lowest share in taxes in more than a decade. This has happened at a time when corporate profits have seen a sharp spike, and inequality and poverty has increased. Unless reversed, such a regressive turn in India’s tax burden will have harmful consequences for mass demand and hence growth.
How did the centre’s GTR in 2020-21 exceed 2019-20 levels?
The devil lies in the detail. Every major tax head (corporation tax, income tax, customs, goods and services tax and Union excise duties), except customs and Union excise duties, saw a lower collection in 2020-21 compared to 2019-20. In absolute terms, only the excise collections have made the difference. On a year-on-year basis, corporation tax collections saw the biggest decline, whereas Union excise duties had the biggest jump. Union excise duty is the only tax head where actual collections have surpassed even the budget estimates in the Union Budget presented on February 1, 2020.
This is the result of a sharp increase in taxes on petrol and diesel. This hike was imposed when crude oil prices crashed, but still continues to be in place. Between March and May 2020, the Central government had overall increased the excise duty on per litre of petrol and diesel by 65.7% ( ₹13) and 101% ( ₹16) respectively from that prevalent before March 14, 2020.
Majority of taxes on petrol-diesel are paid for by the poor
While it may sound counter-intuitive, it is the poor and not the rich, who pay a bigger share of taxes on petrol-diesel. A March 2021 story in this newspaper, based on a survey conducted for the ministry of petroleum by Nielsen in January 2014, gave estimates of end-users of petrol-diesel. The summary findings of the story are worth reproducing here.
Let us say that the government gained 100 rupees each from taxes on petrol and diesel respectively. The end usage data indicates that 60% (i.e. ₹60) of this total tax collected on petrol was paid by the two-wheeler owners, while only ₹37 was paid by the car owners. In case of diesel, the data suggests that for every 100 rupees gained by taxes, ₹13 is paid by the agricultural sector while commercial vehicles (including busses and trucks) have paid ₹38 of total increased taxes. This is bound to get passed on to the non-rich who use these for public transport or via increased transportation cost of goods. Private car owners would have paid ₹28.5 in taxes.
Taxes on profits had the smallest share in overall tax basket since 2009-10
The share of corporation tax collections – taxes on profits of companies – in GTR in 2020-21 is the lowest since 2009-10. 2009-10 is the earliest period for which detailed tax data is available in the Centre for Monitoring Indian Economy’s (CMIE) database. If the 2021-22 budget estimates hold, this figure will improve marginally: from 22.6% to 24.7% between 2020-21 and 2021-22. But it will not go back to previous levels.
The fall in share of corporation tax collections in is likely a result of a sharp cut in corporation tax rates which were announced in September 2019. The government slashed corporate tax rates for domestic manufacturers from 30% to 22%, while for new manufacturing companies; the rate was reduced from 25% to 15% provided they do not claim any exemptions.
A cut in tax rates generates tailwinds for retained profits, which accrue to the rich. To be sure, the bulk of India’s income tax collections also come from what can be described as statistically rich Indians. However, the fact that income tax collections fell by a much smaller amount than corporation tax collections during 2019-20 and 2020-21 (see chart 1) shows that owners rather than their white-collar workers had a better deal when it came to tax rates.
Lower tax rates were an icing on the cake for corporate incomes
A Business-Standard story based on an analysis of Capitaline database says that the combined net profit of listed companies was up 57.6% to ₹5.31 lakh crore in 2020-21. This led to the corporate profit share in GDP hitting a ten-year high of 2.63% compared to a record low of 1.6% in 2019-20. Profits went up in 2020-21 even though revenues fell, as companies managed to cut costs, both for raw materials and wages. This is what has been described as profit-led recovery by many experts.
An overwhelming majority of Indians suffered a fall in incomes as the pandemic wreaked havoc on the economy. “In April 2021, only 4.2 per cent of households said that their incomes were higher than a year ago and only 5.2 per cent said that they expect their incomes to go up in a year”, said an article by Mahesh Vyas, the Managing Director of CMIE on the CMIE website. “These proportions used to be 33 per cent and 30 per cent in 2019-20”, the article adds. The really rich seem to have escaped this predicament and tax policy has helped this process.