Budget 2020: India Moderates Tax Growth Target, But It May Be Still High
The South Block of the Central Secretariat buildings in Delhi. (Photographer: T. Narayan/Bloomberg)

Budget 2020: India Moderates Tax Growth Target, But It May Be Still High

Bookmark

India moderated its expectations for tax collections after two years of setting ambitious targets and then missing it. Yet, it may be still high given the slowing economic growth.

The estimate for gross tax revenue for 2019-20 was revised lower to Rs 21.6 lakh crore from Rs 24.6 lakh crore announced in the previous budget, according to the Union Budget documents. That’s a 4 percent rise over the tax collected in 2018-19, as opposed to the 8.4 percent growth it had originally projected.

Even for the upcoming financial year 2020-21, the government expects a 12 percent increase in gross tax revenue at Rs 24.2 lakh crore. The net tax revenue for FY21 is estimated at Rs 16.35 lakh crore compared with the revised estimate of Rs 15.04 lakh crore for FY20. That, too, is an 8.7 percent growth compared with an 11.4 percent rise it had expected last year.

The government’s revised estimate, however, is higher than what economists expect the actual tax revenue to be. While most economists see a tax shortfall of at least Rs 2 lakh crore in FY20, the government estimated a shortfall of about Rs 1.5 lakh crore. Which means the targets for FY21 could still be seen lofty by some.

This, according to former Reserve Bank of India governor C Rangarajan, is ambitious. Tax buoyancy—a measure of tax collected per unit of gross domestic product—of more than 1, which the government has budgeted for, is optimistic, Rangarajan told BloombergQuint.

The revenue growth estimate comes after yet another year of dismal tax collections. In 2019-20, the government had hoped to earn Rs 16.5 lakh crore in net taxes. This estimate has been revised lower to Rs 15 lakh crore. Till December 2019, the government was able to achieve only 55 percent of its target.

Also read: Budget 2020: Credibility Of Fiscal Math Depends On Higher Tax Revenue, Divestment Boost

In her Union Budget speech, Finance Minister Nirmala Sitharman offered an optional relief to personal income taxpayers looking to boost consumption. Taxpayers are now allowed to avail a lower income tax rate if they forego their deductions and exemptions. This new regime is expected to cost a revenue loss of Rs 40,000 crore. Besides, abolishing the dividend distribution tax would result in a Rs 25,000-crore impact.

Tax collections have been soft across the board in 2019 as India’s economic growth tumbled to a six-year low. A slip on the tax front is inevitable, Nomura analysts, who are expecting a net tax shortfall of about Rs 2.1 lakh crore, wrote in a research note last week.

In particular, the goods and services tax collection lagged growth targets. The government had set a monthly GST collection target of Rs 1 lakh crore for the current fiscal. It has only been able to achieve that in five of the first nine months.

Also read: Budget 2020: Government Sets Lofty Divestment Target Of Rs 2.1 Lakh Crore In FY21

Sitharaman had lowered the corporate tax rate last year to boost growth by spurring investments. Corporate tax collections till December had fallen and were less than half of the budgeted target for FY20.

Sluggishness in tax revenue meant that the central government’s fiscal deficit settled at 3.8 percent in 2019-20, much wider than the 3.3 percent of the GDP it had targeted.

For 2020-21, the government will deviate from an earlier set fiscal path and target a fiscal deficit of 3.5 percent. It has decided to invoke the ‘escape clause’ provided in the Fiscal Responsibility and Budget Management Act allowing it an additional 0.5 percent.

Also read: Budget 2020: Government Pegs FY21 Fiscal Deficit At 3.5%; Invokes Escape Clause In FY20

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.