Demonetisation: Tax collection data may give incomplete picture

The sharp jump in tax collections during the April-December 2016 period has given the government ammunition against doomsayers (including many in the opposition) who were predicting a sharp decline in economic activity after demonetisation.

Net direct tax collections rose 12 per cent to Rs 5.53 lakh crore in April-December 2016 over the corresponding period last year. Indirect tax collections rose 25 per cent to Rs 6.3 lakh crore.

The data may come as a surprise to many as it includes two months-November and December-after demonetisation. So, did the demonetisation not have any negative impact on the economy or there's more to the data than meets the eye? Let's see if everything is as hunky-dory as the government would like us to believe or it's just statistical jugglery.

The direct tax numbers, if sliced, do not look as impressive as the government wants us to believe. Corporate tax collections have grown just 4.4 per cent as against 9 per cent growth estimated in the Budget. This shows muted corporate earnings growth. In 2015/16, corporate tax collections had grown 10 per cent in the April-December period.

Experts say even the lower-than-expected corporate tax collections do not fully reflect the impact of demonetisation. "I doubt if the impact of demonetisation is factored in as it would be felt in March advance tax instalments when third quarter results are available. Corporate tax collections could fall and miss the target by a greater margin as there is no turnaround visible, besides the impact of demonetisation," says Mukesh Butani, Partner, BMR Legal.

Though personal income tax collections rose 25 per cent, experts say a lot of this could be due to tax payments made under the income disclosure scheme (IDS). Under the IDS, around Rs 65,000 crore worth of assets were disclosed, on which 45 per cent tax was supposed to be paid in three instalments by November 30, 2017. The tax collection under IDS is likely to be over Rs 30,000 crore.

"The jump in direct tax collections comes as a surprise. One reason could be that after demonetisation, many who had disclosed assets under the IDS would have pre-poned the payment," says Nidhi Goyal, Managing Director, Taxation, Protiviti, a global risk, business consulting and internal audit firm.

Mukesh Butani of BMR says most individual tax payers are subject to monthly withholding tax on salaries and don't pay advance tax. Hence, the impact of demonetisation on personal income tax collections could be minimum.

He further says that personal tax collections are expected to show an even robust trend due to the impact of the Pradhan Mantri Garib Kalyan Yojna (PMGKY). Under the PKGKY, any black money deposited in banks after November 8 would be taxed at 50 per cent. Also, 25 per cent deposited cash would be locked in for four years without any interest. One needs to watch how much tax is collected under the PMGKY, which closes in March 2017.

In indirect taxes, excise collections soared 43 per cent to Rs 2.8 lakh crore in the April-December 2016 period as against Rs 1.95 lakh crore a year ago. Butani of BMR Legal says this could be due to the ad-valorem basis of charging excise duties on petroleum products, which contribute 40-45 per cent to collections.

He also says that the impact of demonetisation on manufactured goods could perhaps be felt on payments due in January, pertaining to the December month, and there would be a direct correlation between manufacturing figures and excise duty collections.

Service tax collections rose 24 per cent during the April-December 2016 period. This can be attributed to pruning of the (service tax) exemption list in 2016 and additional collections through the Swachh Bharat Cess and the Krishi Kalyan Cess. While the Krishi Kalyan Cess was levied in 2016/17, the Swachh Bharat cess was levied from November 2015.

In 2015/16, collections through the Swachh Bharat Cess were Rs 3,750 crore; they were estimated to Rs 10,000 crore in 2016/17. Similarly, the new Krishi Kalyan Cess is likely to fetch Rs 5,000 crore in the current financial year. Service tax collections showed a 25 per cent jump in 2015/16. However, the government moderated the 2016/17 growth target to 10 per cent in the budget last year.