Reuters reported on Friday that direct tax collections in the current fiscal year could end up being lower than the Rs 11.5 lakh crore collected in 2018-19. The numbers available currently do not indicate this, but do not rule out such a possibility. Total direct tax collection in the current fiscal year up to November 2019, the latest period for which data is available with the finance ministry, was ~5.56 lakh crore, higher than the ~5.41 lakh crore up to November 2018. However, the Corporate Tax collections figure up to November 2019 was ~2.88 lakh crore, which is less than the ~2.91 lakh crore collected up to November 2018.
If the direct tax collections fall short of the 2018-19 figures — and it could, given the sharp fall in the government’s own growth estimates for 2019-2020 — this will only be the second instance of a contraction in direct collections since 1980-81, the earliest period for which data is available with the Reserve Bank of India.
Direct tax collections fell by 3.5% in 1998-99.
If direct tax mop-up fall short of last year’s figures, it merits a through examination of India’s GDP as well as direct tax buoyancy estimates. Tax buoyancy is the ratio of change in tax collections per unit change in GDP.
Let’s look at these one by one.
First, will tax collections come under pressure from the collapse of nominal growth? Nominal growth is growth in GDP without applying inflation adjustments.
The Indian economy is expected to grow at 7.5% in nominal terms in 2019-20. This is the slowest nominal growth rate since 1975-76. The 2019-20 Budget projected a 12% nominal GDP figure. For industry and manufacturing (a subsector of industry), nominal growth in 2019-20 is expected to be the lowest since 1960-61, the earliest period for which data is available with the Centre for Monitoring Indian Economy (CMIE) database. A 40% shortfall in nominal GDP and a collapse in taxpaying sectors means that budgeted tax collections may not materialise. .
Still, this does not justify a contraction in tax collections.
Second, could the government’s corporate tax rate cuts hurt revenue collections?
The government did announce a major reduction in corporate tax rates in September to boost economic activity. These exemptions, the government estimated, would lead to a revenue loss of ~1.45 lakh crore. The 2019-20 Budget assumed total corporate tax and income tax collections in 2019-20 to be ~1.35 lakh crore more than the 2018-19 revised estimates (RE) of ~12 lakh crore. So, prima facie, one could argue that a contraction in direct tax collections is because of the corporate tax reduction. However, this need not be true. This is because the 2018-19 RE direct tax figures are unlikely to be the actual numbers. The Controller General of Accounts (CGA) gives total direct tax collections in 2018-19 to be only ~11.25 lakh crore. This figure is less than the ~11.5 lakh crore figure reported by Reuters.
If direct tax collections dip, it means that there is more to the revenue shortfall than just a reduction in corporate tax rates.
Third, does this mean tax buoyancy has gone down drastically in India?
Any reduction in tax buoyancy will be an embarrassment for a government which unleashed policies such as demonetisation with significant short term pain for the Indian economy to crack down on unaccounted incomes. Despite these measures, the government has not been able to achieve tax buoyancy levels that existed before the financial crisis hit in 2008-09.
If tax buoyancy has indeed gone down, does it mean India’s growth become less revenue generating in nature?
A higher tax buoyancy number indicates that either the nature of growth is more revenue generating or the tax net is more effective at dealing with evasion. The reverse can be inferred if the tax buoyancy number goes down.
The Centre’s response to such a revenue shortfall, if it transpires, will also have an important bearing on the sanctity of the budgetary exercise. In the 2019-20 Budget presented in July last year, the Centre projected a higher RE figure for direct tax collections than the budget estimates (BE). CGA figures showed much lower revenue collections in 2018-19.
No provisional figures will be available for 2019-20 when the Budget is presented on February 1, 2020. Any attempts to temporarily hide the revenue shortfall through rosy assumptions — the Budget is only expected to give actual figures with a two year time lag — will only lead to loss of credibility and result in misplaced assumptions forming the basis of policymaking.