Advance tax and green shoots

Advance tax and green shoots
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First Published: Wed, Sep 16 2009. 08 52 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Wed, Sep 16 2009. 08 52 PM IST
It may be premature to say that green shoots have turned into shrubs. But if advance tax collections are an indicator, there may be reason to cheer. Partial data, from Mumbai, shows that second quarter (Q2) advance tax collection has gone up by 20% compared with Q2 in the last fiscal.
The growth in collection, across industries (Q2 this fiscal compared with the same period last year), varied from 35% to 40% with sectors such as oil and gas, automobiles, infrastructure and banks doing well. Some of this can be attributed to the cheap money and government stimuli. In that sense the massive fiscal and monetary expansion unleashed in the past 8-10 months seems to be working.
Illustration: Jayachandran / Mint
In broader terms, this augurs well for the government. Because companies are expected to pay 30% of their estimated tax due in Q2, a robust growth in this quarter indicates a better chance of the government meeting its direct tax collection target. This stands at Rs3.7 trillion in 2009-10. This may not be met, but that will be due to reasons beyond the government’s control. For example, tax collections from consumer goods manufacturers may not show growth in the months to come due to the drought slowing rural consumption.
It is almost impossible for the Union government to compress expenditure, given its spending commitments. This has caused the fiscal deficit to gallop to 6.8% of the gross domestic product (GDP), perilously close to a mark when international credit rating agencies start taking a negative view of sovereign ratings. As a result, there is heavy burden on the revenue side to plug the hole in our public finances. It is in this context that higher tax collection spells good news.
By any measure, this is a difficult task. A fiscal deficit of Rs4 trillion is difficult to bridge even in the best of times and this is a difficult year. Much will depend on the policy course during the remaining part of the year. While growth is recovering, there is increasing realization that tightening of monetary policy is called for. If that happens, what will happen to bank earnings and taxes due from them? What will be the impact on interest rate sensitive sectors such as automobiles and realty?
All this presents a challenge for the government. Medium-term macroeconomic stability requires it to take steps that might curb growth based on the splurge it has engaged in. But that has the potential to disrupt matters in the short-run. Effecting a smooth transition is the key to managing this situation.
Does higher advance tax collection indicate green shoots? Tell us at views@livemint.com
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First Published: Wed, Sep 16 2009. 08 52 PM IST
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