Budget likely to estimate 10.5% growth in direct tax collections for FY25: Officials

Finance Minister Nirmala Sitharaman will present the interim Budget for 2024-25 on February 1.

The upcoming Budget 2024 is likely to aim for a 10.5 percent growth in direct tax collections,  in spite of apprehensions of a slowing global economy in 2024, and a high base of revenue collections in the current fiscal, three senior government officials said.

“India is likely to budget the same rate of growth in direct taxes next year as well, which will be on the high base of this fiscal. Growth in direct taxes will be above the GDP growth rate — a 10.5 percent growth in direct taxes in FY24-25 is realistic. Buoyancy is likely to remain above 1 next year,” a senior government official told Moneycontrol.

Buoyancy captures the proportionate increase in tax revenues in response to a rise in national income.

With a growth of 10.5 percent, the net direct tax collection is budgeted at Rs 18.2 lakh crore in 2023-24.

The inflation in the US is still high at above 3 percent, but that has not yet resulted in a global slowdown. The China+1 strategy, stable government, and robust economic factors should lead to double-digit growth in direct taxes next year as well, another senior government official said.

In FY23-24, net direct tax collections stood at Rs 9.57 lakh crore as of October 9, according to government data. So, far two instalments of advance direct tax collections have been received.

The officials said the growth in direct taxes is likely to exceed the budgeted 10.5 percent and reach up to 17-18 percent in the current fiscal on account of the widening of the tax base due to formalisation of small businesses under GST (Goods and Services Tax), data sharing with other departments leading to better compliance, increased data intelligence, etc.

“The formal economy is increasing, GST collection is increasing, domestic demand continues to be high, and direct tax revenue will be more than expected. Direct tax growth rate may be 17-18 percent this year despite the global challenges of Ukraine and Israel-Palestine. It has been good going for India. There is general economic well-being, production is increasing, there are no big business failures, personal income tax is increasing, small businesses are clocking a higher turnover because of formalisation under GST, etc. The auto-populated tax returns thanks to artificial intelligence and big data have also contributed to the upswing in direct tax collection. No reason this momentum in higher direct tax collection should not continue,”  a third senior government official told Moneycontrol.

He said that the over 20 percent growth currently visible in direct taxes is unlikely for the full year, as there may be netting on account of pending refunds.

“The full-year direct tax growth rate will not be double the budgeted 10.5 percent in FY24. There may be netting on account of accumulated refunds. However, the growth in gross direct tax is likely to continue as projected,” he added.

The direct tax growth post-Covid has remained high in the last two-three years. While the GDP has picked up after the pandemic, tax growth has picked up quicker due to better collections.

“A lot of companies are shifting to the 22 percent corporate tax regime (without incentives), small businesses have become part of the formal economy, tax deducted at source has increased, third party information has increased, the economy has grown — all of this has led to an increase in direct tax revenues, " the official said.

Further, the income tax department is likely to get additional revenues in Budget 2024 after the recent Supreme Court (SC) judgments on Double Taxation Avoidance Agreements (DTAA) and interpretation of telcos’ Adjusted Gross Revenue (AGR), a person aware of the developments told Moneycontrol.

The SC has ruled that multinational companies (MNCs) cannot avail of benefits under DTAA unless Indian tax authorities explicitly notify the same. Simply put, the apex court has held that even if India enters into a DTAA with a nation, one cannot avail of benefits under it, unless it is woven into the country’s laws by a notification. This will lead to a lot of MNCs having to pay additional income tax to the authorities in 2023-24, he explained.

In another recent SC ruling on October 16, the licence fee that telcos pay every year as a percentage of their profit will be treated as capital expenditure and not as revenue expenditure. The taxable income of telcos is likely to increase owing to this judgment, he added.