Analysing Budget 2020’s Tax Targets 
A bus conductor displays Indian bank rupee notes for a photograph in Coonoor, Tamil Nadu, India. (Photographer: Dhiraj Singh/Bloomberg)

Analysing Budget 2020’s Tax Targets 

Tax revenue is the largest, most critical source of revenue for any government and yet in India these past few years it has also been most difficult to forecast given the many policy changes.

In the Union Budget presented on February 1, Finance Minister Nirmala Sitharaman estimates tax revenue will contribute 55.75 percent of the government’s revised estimate of Rs 26.99 lakh crore total revenue for fiscal year 2019-20, and 52.85 percent of the budget estimate of Rs 30.95 lakh crore total revenue for fiscal year 2020-21. But both revenue estimates seem difficult to achieve, show past data.

Let’s start with the tax targets for the ongoing fiscal year FY19-20.

Last Quarter, Big Hopes

Acknowledging the economic slowdown and subsequent weakness in tax collection, as also the impact of corporate tax rate cuts in 2019, the government has revised downwards its gross tax revenue estimate for the fiscal year—from Rs 24.61 lakh crore in the July 2018 budget to Rs 21.63 lakh crore. But even that will be challenging to meet given that as of December end, as per CGA data, net tax collected amounts to just Rs 13.83 lakh crore or 64 percent of the revised estimate. The government hopes to collect the remaining 40 percent over three months (January-March) and while the last quarter does traditionally see an increase in tax collections, it is unlikely to be this high.

FY20 Revised Estimate: Rs 21,63,423 crore
As of December 2019: Rs 13,83,035 crore
January-March Target: Rs 7,80,388 crore.

“Required run rate for tax growth in the January-March period still looks ambitious in the context of the tracking growth rate.” - Morgan Stanley Report

In FY19, by December the government had collected 68 percent of the total gross tax revenue. But then growth in FY19 had not cratered the way it has in FY20.

Corporate Tax
FY20 RE: Rs 6,10,500 crore
As of December: Rs 3,69,533 crore
Achieved: 60.5%
December FY19: 64.4%

Income Tax
FY20 RE: Rs 5,59,500 crore
As of December: Rs 3,17,652 crore
Achieved: 56.8%
December FY19: 64%

FY20 RE: Rs 6,12,327 crore
As of December: Rs 3,68,838 crore
Achieved: 60%
December FY19: 74.4%

CGST Compensation Cess
FY20 RE: Rs 98,327 crore
As of December: Rs 70,499 crore
Achieved: 71.7%
December FY19: 74%

FY20 RE: Rs 1,25,000 crore
As of Dec: Rs 8,51,54 crore
Achieved: 68%
December FY19: 82%

FY20 RE: Rs 2,48,012 crore
As of December: Rs 1,53,199 crore
Achieved: 62%
December FY19: 67.4%

When compared to December collections for FY19, the data show that income tax revenue, customs and corporate tax are lagging the most.

Analysing Budget 2020’s Tax Targets 

FY21 Estimates: Ambitious

The budget estimates for the oncoming fiscal year 2020-21 are even more challenging to achieve, for three reasons.

  1. Base Uncertain
  2. Aggressive Nominal GDP Growth Estimate
  3. Tax Revenue Growth Targets Ambitious

Base Uncertain
As explained above, FY20 tax revenue targets look tough to achieve. And if the Rs 21.63 lakh crore revised target for this fiscal is not met, then the FY21 budgeted target of Rs 24.23 lakh crore in gross tax revenue will become a steeper climb.

Aggressive Nominal GDP Growth Estimate
The budget estimates 10 percent nominal GDP growth in FY21, compared to 7.5 percent estimated in FY20 and over 11 percent in FY19. But, ratings agency Moody's sees GDP growth rising to around 8.7 percent in the next financial year, on the back of real GDP growth of 5.5 percent. India’s Economic Survey last week pegged FY21 GDP growth at 6-6.5 percent.

Several economists and brokerages also believe the government’s estimate is “optimistic”.

This growth number seems to be a bit on the optimistic side, given the real GDP growth continue to moderate and inflation is expected to cool-off below 4% in the second half of 2020-21 as food inflation spikes moderate and a high base effect kicks-in.
HDFC Bank Report

Tax Revenue Growth Targets Ambitious
Topping the GDP optimism are ambitious growth estimates for tax revenue - gross tax revenue growth has been estimated at 12 percent versus a 4 percent revised target for FY20.

The budget assumes a tax buoyancy of 1.2 for 2020-21 compared to 0.5 (FY20 RE) and 0.8 (FY19) over the last two years.
HDFC Bank Report

Both direct and indirect tax growth targets are lofty. Direct taxes are expected to grow at 12.7 percent, whereas indirect taxes at 11.1 percent, over the revised target for FY20, show the budget documents.

Analysing Budget 2020’s Tax Targets 

So, the Finance Minister needs all three factors to work in her favour to meet next year’s tax targets.

To be sure, there are believers too. Nomura says in its budget analysis that “the nominal GDP growth basis for FY21 at 10 percent is reasonable, in our view. The tax assumptions are also reasonable, with the direct tax buoyancy coefficient pegged at ~1.3 and the indirect tax buoyancy coefficient at ~1.1 – modest by historical standards. However, these may seem a tad ambitious compared to the sharp plummet in tax buoyancy in FY20, especially in the cases of corporate taxes, GST and custom duties, which were impacted by the growth slowdown and the corporate tax cut”.

The trouble with making an emphatic assertion regarding the success or failure of these estimates is that continuous policy change has made the last few years’ data difficult to compare and draw conclusions. First the impact of demonetisation, then GST, the frequent changes to GST rates, the increase in import duties over the past two years, the many tax settlement schemes in the past three years, the corporate tax rate cut (optional)...and now the personal income tax rate, also optional.

When viewed alongside nominal GDP growth the tax revenue targets are stretched but achievable, a Credit Suisse report says. It points out that “direct tax growth can differ significantly from nominal GDP growth both on up and downside”.

On the indirect tax front, Credit Suisse says the tax assumptions imply an improvement in compliance in GST.

Analysing Budget 2020’s Tax Targets 

A clearer picture will emerge in a few months when the provisional data for the January to March quarter is available, to gauge if yet another budget has misjudged income potential, and by what margin. In FY19, the budget estimated an 18 percent increase in gross tax revenues, the year ended with just over 8 percent.

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