Slowdown in tax revenue a fresh problem for govt

The growth in tax collections seems to be slowing compared to last year. Data from the Controller General of Accounts (CGA) shows that gross central taxes grew 6.6% in the April-July quarter, as against 11.7% in the year-ago period. Direct tax revenue growth slowed from 6.7% to 5.8% during the period. Indirect tax revenue growth too slowed from 16.1% to 7.3%, while income tax revenue fell sharply from 11.3% to 6% during the period under consideration. Beating the trend, in the first four months of FY20, corporate tax revenues had grown 5.5%, faster than the 0.6% in the corresponding period of FY19.

Will collections fall short of estimates?

According to the CGA’s provisional actuals, the previous fiscal saw gross tax revenue shortfall of ₹1.9 trillion. This year, the collections are budgeted at ₹24.6 trillion. But the finance ministry has informally informed the 15th Finance Commission that actual collections could fall short by ₹2 trillion, said a commission official, requesting anonymity. The shortfall is primarily on account of unrealistic revenue growth projections in budget estimates. Given the slowdown and the cut in corporate tax rates, not to forget below-expectation GST mop-up, collections could fall short of estimates.

How much will corporate tax cuts hurt collections?

The immediate impact on revenue collections of the cuts announced on 20 September will show over the course of the year. The finance ministry has said it expects loss of ₹1.45 trillion due to the rate cuts. But independent estimates by economists peg the losses at much lower levels, considering that companies will no longer be able to enjoy exemptions.

Can non-tax revenue offset the shortfall?

Non-tax revenues in April-July stood at 14% of the budgeted target. Data shows 11.7% of the divestment target of $1.05 trillion has been achieved till 23 July. In FY20, ₹1.4 trillion will be transferred from the RBI to the government, as per the Bimal Jalan Committee formula. About ₹90,000 crore of this sum was part of FY20 budget estimates. The remaining ₹50,000 crore is insufficient to cover the shortfall. Much will depend on divestment proceeds and collections from the spectrum auction.

Is there headroom to reverse the slowdown?

The Centre’s capex in April-July contracted 3.4%. At 1.6% of GDP, capex is quite low. Government’s share in total investment is only 5%. Revenue expenditure growth slowed to 7.9%, but revenue deficit budgeted at 2.3% of GDP has left little fiscal room for government spending. Since the corporate tax cuts may increase tax collection shortfall, reliance on additional borrowing and non-tax revenues to plug the fiscal deficit is set to grow.

Puja Mehra is a Delhi-based journalist and the author of The Lost Decade (2008-18).