The central government published its accounts for 2020-21 on Monday. For the first time in 12 years, income tax collections were higher than the corporation tax collected by the government.
Corporate tax collections levied on profits of firms contracted 18 per cent in 2020-21 while personal income tax collections fell by only 2.3 per cent.
Collection
Data released by the Controller General of Accounts showed that corporate income tax collections were at Rs 4.57 lakh crore and personal income tax at Rs 4.69 lakh crore in 2020-21.
This can be seen in the chart accompanying the piece, with the income tax curve and the corporation tax curve, which have run largely parallelly over the years, crossing for the first time.
Income tax primarily consists of tax on income paid by individuals and Hindu Undivided Families (HUFs). Corporation tax is the tax paid by companies on the profit they make.
Reason
After coming to power for a second term, the Narendra Modi government had slashed corporate tax rates in September 2019 by around 10 percentage points.
The effective tax rates were brought down to around 25 per cent for existing companies and to around 17 per cent for new companies in the manufacturing space.
Trend Analysis
Due to the sharp reduction in the tax rates as well as the economic slowdown, corporate tax collections have been falling over the last two years after peaking at Rs 6.6 lakh crore in 2018-19.
Corporate tax collections fell 16 per cent in 2019-20 and then 18 per cent in 2020-21. The collections have actually fallen by more than 31 per cent over the levels seen in 2018-19.
Tax return filings of firms also back this trend, Nearly 15 lakh income tax returns were filed by firms in 2020-21 for income earned the previous year.
However, only 13 per cent of these returns were for income ranges of more than Rs 5 lakh. The remaining 87 per cent of the returns were for income up to Rs 5 lakh.
In contrast, over 13 lakh returns were filed in 2019-20 (for income earned in 2018-19), with 18 per cent of the returns were for income ranges of over Rs 5 lakh. The remaining 82 per cent were returns filed for income of up to Rs 5 lakh.
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