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Small cities push for direct tax
November, 18th 2009

Direct tax collections rose sharply in many of the small cities in April-October 2009 in contrast to the bigger ones where they either declined or grew at low single-digit rates.

This suggests the effect of the slowdown has not been uniform across the country and smaller cities have shown more resilience as compared to their bigger counterparts.

One possible reason for this is the split of direct taxes between corporate tax and personal income tax. The direct tax collections, in general, remained robust in cities where personal income tax has a higher share in the overall corporate taxes.

Kanpur, for instance, has tax collections evenly split between corporate and personal income tax (PIT). The collections rose nearly 50 per cent in the city. At the other extreme, Meerut has only 15 per cent contribution from PIT; it reported a negative 0.3 per cent growth.

This perhaps suggests that individual incomes have possibly not taken as much hit as corporate profits. Of course, the correlation is not perfect. Lucknow has the highest share of PIT in total taxes but it reported a meagre 6 per cent growth in tax collections.

Interestingly, the trend in collections remained positive although some regional direct tax collection centres such as Chandigarh, Kanpur and Jaipur have significant export-based manufacturing.

The resilience in non-metro regions could also stem from the fact that small manufacturers and small traders have thrived on local and regional demand, coming from the rural centres around these small cities.

Big cities, on the other hand, have large corporates, the revenues of which have taken a beating in the slowdown. Another factor that seems to have acted in favour of small towns is that public sector or government employees, who remained completely unaffected by the downturn and form a large part of its population.

Direct tax collections from smaller cities began improving from 2006-07 when Indias growth story gained momentum.

The four years of over 9 per cent growth pushed incomes up in smaller cities. A lower 6.7 per cent growth has not shaved off the benefits reaped by these towns as fast as that in the big cities.

In the first seven month of the current fiscal, direct tax collections in Mumbai grew 4.3 per cent, declined by 9.6 per cent in Delhi and 2.6 per cent in Bangalore. This is in contrast to over 30 per cent, 7.29 per cent and over 36 per cent growth witnessed in direct taxes collected from these cities respectively in 2007-08 when the economy was booming.

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