Context: The latest data released by the Income Tax (IT) department shows that India’s net direct tax collections grew 16.45% to Rs 15.82 trillion between April 1 and December 17 of FY-2025. The growth is largely driven by a rise in non-corporate tax receipts.
Relevance of the Topic: Prelims: Tax Receipts- Trends, Composition, etc.
What is Direct Tax?
- A Direct tax is imposed directly on the taxpayer and paid directly to the government by the persons (juristic or natural) on whom it is imposed. A direct tax is one that cannot be shifted by the taxpayer to someone else.
- Central Board of Direct Taxes (CBDT) governs and administers the Direct tax.
Direct Tax Components and Latest Trends
The some important direct taxes imposed in India are as under:
- Corporate Tax:
- The companies and business organisations in India are taxed on the income from their worldwide transactions under the provision of Income Tax Act, 1961.
- Current Growth (FY 25): Grew at a slower pace of 8.6%.
- Non-Corporate Taxes:
- Income Tax: Income Tax Act, 1961 imposes tax on the income of the individuals or Hindu undivided families or firms or co-operative societies (other than companies) and trusts (identified as bodies of individuals associations of persons) and artificial judicial persons.
- All residents are taxable for all their income, including income outside India.
- Non residents are taxable only for the income received in India or Income accrued in India.
- Current Growth (FY 25): 22.5%.
- Income Tax: Income Tax Act, 1961 imposes tax on the income of the individuals or Hindu undivided families or firms or co-operative societies (other than companies) and trusts (identified as bodies of individuals associations of persons) and artificial judicial persons.
- Securities Transaction Tax (STT):
- STT is levied on selling or purchasing securities on listed stock exchanges.
- Growth: 85.5%
- Other Taxes:
- Include: Equalisation Levy, Gift tax etc.
- Growth: 5.9%.
Significance for India’s Economy
- Broadened Tax Base: The increasing share of non-corporate taxes indicates better tax coverage and improved tax compliance among individuals and small entities.
- Balanced growth: Tax collection is better in both corporate and non-corporate, reflecting a balanced growth.
- Policy Reforms Impact: Tax simplification measures and digital tax filing platforms may have contributed to higher collections by reducing procedural hurdles.
- Stock Market Dynamics: Higher STT tax revenue reflects robust trading activity and increased participation of retail and institutional investors in the Indian equity market.
- Boost to Fiscal Space: Enhanced direct tax collection enhances government’s fiscal flexibility, enabling robust funding for developmental and welfare programs.
Challenges in Direct Tax Collection
- Over-reliance on Non-Corporate Taxes: A slower rise in corporate tax revenues may reflect challenges in the corporate sector (including profitability in key industries).
- Inequality Concerns: Higher taxes on individuals and small entities may reflect rising tax inequity, and needs to be balanced to ensure equity in taxation.
- Refund Delays: Despite growth in refunds, delays in processing refunds remain, which impacts the liquidity of the taxpayers (particularly the small businessmen).
Way Forward
- Strengthen the Corporate Tax Base: Simplify corporate tax structure, encourage investment and ease of doing business to boost corporate tax revenues.
- Encourage Compliance: Incentivise digital filing of taxes and conduct programs for awareness and financial literacy for non-corporate taxpayers.
- Improve Refund Mechanisms: Deploy technology for quicker refund processing and reduce procedural delays.
- Enhance Stock Market Regulation: Ensure sustainable trading volumes to maintain STT growth.