India's tax pie seems to have undergone a subtle change with a sharp drop in the direct tax collections resulting from a disproportionate impact of the COVID-19 carnage on incomes. The share of indirect taxes, which mainly comprise of levy on goods and services as well as import duty, has risen while that of direct taxes - made up of corporate and personal income tax - has gone down in 2020.
While the government has officially not released direct and indirect tax collections, industry sources said the share of indirect taxes in overall tax collections rose to about 56 percent, the highest in over a decade for the period. This follows a sharp 26-27 percent decline in the direct tax collections Finance Secretary Ajay Bhushan Pandey said. In a pandemic like this where the economy has been impacted, any large-scale changes impact direct taxes more severely, whereas indirect tax collection is mostly proportional to business turnover and compliance. "In a situation like this where the economy has been impacted and we are on the recovery path, the direct taxes are impacted more severely because the profitability of a company is not directly proportional to the turnover always. If your turnover reduces below a certain benchmark then the profit will not merely reduce, but it may get into a negative zone and therefore the company may not pay any income tax as it will be into a loss.
"Similarly, when we are in a recovery phase, the companies will take a longer time to come into the profitable zone to pay income tax. In the case of indirect tax, it is more or less proportional to the business volume and turnover and compliance," he said.
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