Analysis: How tax revenues increased in a pandemic year

The Union government’s net indirect tax revenues jumped 12.3% in 2020-21 to Rs 10.71 lakh crore, despite the economic contraction in the first half of the fiscal year. The jump in tax collections was an outcome of a sharp increase in excise duties on petroleum products early in the year, chiefly diesel.

The excise duties levied on diesel were doubled between March and May 2020 when signs of budget calculations going awry emerged following curbs on mobility and economic activity to contain the spread of the Covid-19 pandemic. The excise duty on petrol had also been raised simultaneously.

Such sharp increases in duties, without a corresponding rise in retail prices at that point, became possible as crude oil prices had plummeted to fall below $20 a barrel. Crude oil prices have since climbed to $65 a barrel but taxes remain elevated, as the dependency on petroleum taxes are very high.

The Union government has not revealed the contribution of petroleum crude and products in the provisional excise duty collections for the fiscal year, but it might be 85-90% of the collections, with the share of diesel at 65-70%.

What we do know is that the Union government had collected Rs 2.95 lakh crore as excise duty on petrol, diesel and natural gas between April and January of 2020-21. This was revealed in a reply to a question in Lok Sabha. The collection from diesel alone was Rs 2.05 lakh crore during this period. The demand for petrol and diesel was robust in February and March and it may have helped excise duty collections rise faster in the two months. The demand for petrol had climbed to an all-time high in March 2020 and diesel to its highest since December 2019.

The finance ministry has provisionally estimated net collections from excise duties and arrears of service tax at Rs 3.91 lakh crore, up a staggering 59% from a year ago. It is to be noted that service tax was subsumed into the goods and services tax (GST) in July 2017 but a small amount which are arrears of the preceding years are still being collected.

The 21% rise in net collections of customs duties in 2020-21 to Rs 1.32 lakh crore despite about a 16% fall in imports was also an outcome of an increase in duties on several items in the Union budget for the year. Duties on some items such as tyres were increased later in the year. It was hoped that these duty increases would discourage imports from China and promote the Aatmanirbhar Bharat Mission. Thus, the year saw higher customs duties on goods such as cooking oil, electronic goods including mobile phones, electric goods such as home appliances, toys, tyres, furniture, footwear and passenger vehicles.

The GST collection for the year was lower than in the previous year, as collections collapsed in the first half of the year due to a contraction in consumption amid a nationwide lockdown and the continued restrictions on mobility. The services sector industries such as hospitality and entertainment continued to suffer till the end of the year due to the restrictions and so, their contribution to the GST collections would have contracted sharply.

The gross monthly collections (Centre, states, imports and cess combined) in the second half exceeded Rs 1 lakh crore to reach a record high of Rs 1.24 lakh crore in March as consumption rebounded. The Centre’s share in the total collection after settlement with the states is a little less than half.

The net direct tax revenue collections did not too badly, rising to Rs 9.45 lakh crore to exceed the revised estimates of Rs 9.05 lakh crore by a modest 4.5%. The finance ministry had lowered the net direct tax collection target for 2020-21 by 31% from Rs 13.2 lakh crore announced in the budget last year.

Net taxes collected on incomes of companies was provisionally estimated at Rs 4.57 lakh crore, about 2.5% more than the revised estimates and net taxes on personal income, including securities transactions tax, at Rs 4.88 lakh crore, about 6.3% more than the revised estimates.

The rise in the net collection of taxes on corporate income appears muted when compared to the jump in profits reported by companies in the second and third quarter of the fiscal year. This seems to be a result of increased refunds during the year, as the tax department likely collected excess taxes in the preceding years to meet its revenue targets. Indeed, direct tax refunds in 2020-21 were 42.1% higher at Rs 2.61 lakh crore compared to Rs 1.83 lakh crore in 2019-20.