Reports have appeared in the section of the press regarding early signs of an economic slowdown based on advance tax payments by corporates during the Financial Year 2008-09.

Ministry of Finance clarifies that the total Direct Tax collection during the period April-July, 2008 is Rs. 71648 crores as against an amount of Rs. 48756 crores during the corresponding period in 2007-08. This translates into a robust growth rate of 46.95 per cent during the current fiscal year. The total direct tax collections comprise of, inter alia, advance tax payments, tax deducted at source, self-assessment tax payments and post-assessment tax collections. At the level of the taxpayer, advance tax payments and tax deducted at source are substitutes and inversely related to each other, i.e., if the tax deducted at source is high, a relatively smaller amount is payable as advance tax.

During the period April-July, 2008, tax deducted at source on payments received by companies has increased to Rs. 22128 crores from Rs. 13782 crores during the corresponding period in 2007-08, thereby recording an increase of 60.55 per cent as against a growth rate of 43 per cent during the same period in the fiscal year 2007-08. This unprecedented increase in TDS collections is reflected in relatively lower growth rate of 24 per cent in advance tax payments during the same period as against a growth rate of 28 per cent during the same period in the fiscal year 2007-08. This trend is consistent with past experience.

The trend of direct tax collections is one of the many indicators of the health of the economy. The robust growth of direct tax collections by 47 per cent during April-July, 2008 is rather an indication of a buoyant economy. It is, therefore, inappropriate to use the growth rate in advance tax payments, in isolation, for analyzing the health of the economy.

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Advance tax payments may be misleading as an economic indicator when TDS rises; consider total direct tax collections instead. The Ministry clarifies that higher total direct tax collections reflect robust revenue growth and that advance tax and tax deducted at source are partial substitutes: increased TDS on company payments reduced residual advance tax liabilities, causing a lower growth rate in advance tax receipts despite strong aggregate direct tax collections; therefore advance tax growth alone is an inadequate indicator of economic health.