Budget 2020: India Is Headed For Its Biggest Tax Shortfall In A Decade
India has not even achieved half of its tax target in the first eight months of 2019-20 (Source: Unsplash)

Budget 2020: India Is Headed For Its Biggest Tax Shortfall In A Decade

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India set itself an ambitious tax target. Now it’s far away from achieving it. Perhaps, the farthest it has been in 10 years.

The central government had budgeted a 25 percent increase in net tax collections for 2019-20, despite a fall in the previous year. Till November, the Centre’s tax revenue had only grown 2.6 percent—the worst since 2009-10—or after the global financial meltdown.

In the first eight months of the fiscal, the government has achieved 46 percent of its tax target, according to data collected from the Comptroller General of Accounts. To be sure, a large chunk of the tax collections are shored up in the final three months of the financial year.

Still, that will not be enough to plug the deficit. According to BloombergQuint’s calculations, the government’s net tax collection will have to rise by a whopping 119 percent in the final four months of 2019-20 to meet the target.

That has never happened in the past 10 years. On average, net tax collections between December and March increase by 93.6 percent. Going by that, India’s net tax collection will still see a shortfall of Rs 1.96 lakh crore—12 percent lower than the target.

Rs 1.96 Lakh Crore
India could miss its net tax revenue target by 12 percent, according to BloombergQuint’s calculations.
Budget 2020: India Is Headed For Its Biggest Tax Shortfall In A Decade

The estimates are based on historical trends and the actual shortfall could turn out to be worse, according to some economists.

Shortfall In A Slowdown

Tax collection has been soft across the board as India’s economic growth tumbled to a six-year low in the July-September quarter. The slip on the tax front is inevitable, Nomura analysts, who expect a net tax shortfall of about Rs 2.1 lakh crore, wrote in a research note last week.

HSBC sees an even bigger miss. It expects net tax collection to fall short of the budget estimates by Rs 2.7 lakh crore. “Weak economic activity along with a low tax buoyancy is likely to keep both direct and indirect tax collections low,” it said.

In particular, Goods and Services tax collection has 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 four out of the first eight months. Customs duty collections, too, have been hit, falling over 12 percent till November 2019.

On the direct tax front, income tax collections have declined over the previous year. They generally tend to pick up in the January-March period. The biggest factor has been corporate tax collections—the mainstay of India’s total tax revenue.

Finance Minister Nirmala Sitharaman had lowered the corporate tax rate in an attempt to boost growth by spurring investments. Corporate tax collections till November had declined 1 percent compared to the same period last fiscal.

But even after removing the impact of the rate cut, collections remain low signalling the “lack of an improvement in tax collection efficiency and compliance,” HDFC Bank Ltd.’s economists said in a pre-budget note. Their research noted that tax buoyancy—a measure of tax collected per unit of GDP and hence neutral to the economic growth scenario—is expected to fall to 0.6 compared to the budgeted 1.7. It expects a tax shortfall of Rs 2.95 lakh crore.

Consequently, the government’s transfer of tax revenue to the states has also come down—something that a number of state finance ministers have pointed out. The Centre’s assignment of tax revenue to states till November was 2.3 percent lower than last year.

Also read: Budget 2020 Ideas For Growth: Overhauling Revenue Expenditure

Weakness in tax revenue will lead to the government missing its target of keeping the fiscal deficit under 3.3 percent of the gross domestic product. It has already deferred its elusive 3 percent fiscal deficit target to March 2021. Originally, it had planned to bring the gap down to 3 percent by March 2017.

While tax revenue struggles, economists expect the non-tax revenue to offset some of the impact. The government is expected to seek an interim dividend from the Reserve Bank of India and through higher divestment receipts.

The pressure will also fall on government departments to improve efficiency. India has already raised its monthly GST target to Rs 1.1 lakh crore for the December-March period. Besides, the Department of Economic Affairs has asked ministries to cap spending at 25 percent of the budgeted estimate from the earlier 33 percent during the January-March quarter.

Also read: Budget 2020: India Stares At Rs 2-lakh-Crore Tax Shortfall; Little Room For Personal Income Tax Relief

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