Govt seeks to make up for direct tax shortfall

Govt seeks to make up for direct tax shortfall

New Delhi: Direct tax collections in the current fiscal are likely to fall short of finance minister Pranab Mukherjee’s revised estimates, forcing the government to look at ways to cut expenses in some areas.

Loading video...

As of 15 March, the deadline for the last instalment of advance tax payments by companies, total direct tax collections amounted to around Rs3.07 trillion compared with Mukherjee’s revised estimates of Rs3.86 trillion in the current fiscal.

Direct tax collections in 2009-10 could fall short of revised estimates by around Rs10,000 crore as the advance tax collections in the fourth quarter have been lacklustre, admitted an official in the finance ministry who did not want to be identified.

Advance taxes paid in the current quarter, the fiscal year’s last, by India’s 100 largest corporate taxpayers grew 11.84% to Rs22,209 crore from a year earlier. The final figure for the entire list of corporate taxpayers was unavailable.

The shortfall could be offset by savings on previously sanctioned expenditure, a second finance ministry official said, asking not to be identified. By early next week, the ministry will finalize ways to deal with any shortfall as a clearer picture of the final number emerges, the official added.

If savings on previously sanctioned expenses are not enough to bridge the gap, one option before the government would be to use treasury bills to raise resources. Treasury bills are short-term loans raised by the government to bridge temporary resource gaps.

The Union government has managed to use savings on previously sanctioned items to meet unexpected demands on its resources in the current fiscal. On Tuesday, the Rajya Sabha cleared the finance ministry’s second supplementary request for Rs31,780 crore additional spending. The bulk of the spending was to subsidize retail consumption of petroleum products and fertilizers, which was met through such savings.

The volatility that has characterized the economy and, consequently, revenue estimates, could exert pressure on the finance ministry to find ways to stick to the Budget’s estimates on revenue and fiscal deficits at 5.3% and 6.7% of the gross domestic product, respectively.

Advance taxes paid by companies make up about 40% of total direct tax collections, and any decline has an adverse impact on government finances.

A part of the reason for the volatility is that the bulk of direct taxes is sourced from a small pool of companies. For instance, the 100 largest corporate taxpayers contributed about 54% of the aggregate corporate advance tax paid in 2008-09.

In the current fiscal, the growth in corporate advance tax payments decelerated between the third and fourth quarters on account of the profitability of banks being adversely affected by hardening interest rates. Banks account for around one-third of the top 50 corporate taxpayers, and their performance has a bearing on the overall collections. A significant increase in tax payments of manufacturing firms was inadequate to offset the pressure on banks’ profits in the last quarter.

“That’s an indication people were more bullish in the third quarter. In the fourth quarter, when they started counting, it is not growing as much," said Rahul Garg, executive director at PricewaterhouseCoopers, commenting on the trend in tax payments. Advance taxes are paid on an internal estimate of the year’s profits. “It’s more a matter of preciseness, a better estimate," he added, while referring to a drop in the growth rate between the quarters.

The 11.84% growth in advance tax payments by the 100 largest corporate taxpayers in the current quarter (compared with the same quarter last year) marks a significant drop from the 30% growth seen in the third quarter of this year. Still, for the entire year, the advance tax payments for these firms is, at Rs83,727 crore, 18.26% higher than that seen in 2008-09.