The surprise 22 percent increase in tax revenue in the April to December 2016 period suggests the government may exceed its tax collection target for financial year 2016-17. That in turn suggests the government may have some room to increase expenditure without ditching fiscal discipline. Unfortunately, that may not be the case.
The increase in tax revenue collection is more likely due to higher service, excise tax rates and three amnesty schemes and less due to an expansion in economic activity. Add to that the yet-to-be-determined demonetisation impact and resultant uncertainty in tax revenue for the January-March 2017 quarter and it’s not very clear what the final revenue number for the year will be.
Even if the government were to exceed the tax collection target for this fiscal, the next one, 2017-18, is beset with known unknowns.
Mid-year will see the implementation of the Goods and Services Tax, a base widening effort but not necessarily in the first year itself. Besides, the central government has also guaranteed to compensate states for revenue lost due to GST, estimated at Rs 50,000 crore in the first year. And if crude prices continue to rise, some reduction in the ad-valorem duty may become necessary. In the absence of revenue predictability, it is tough to guess how Finance Minister Arun Jaitley will wield tax policy. As a tool to boost consumption or to collect more revenue?
Dinesh Kanabar, tax expert and chief executive officer of Dhruva Advisors, is confident there is opportunity to reduce both corporate and personal income tax rates.
There have been a lot of deposits in bank accounts post demonetisation. While estimates are always guesstimates, there is a decent portion of it which otherwise was not accounted and was not therefore a subject matter of taxes. That income is really going to give buoyancy to taxes.Dinesh Kanabar, CEO, Dhruva Advisors
Kanabar expects the finance minister to cut the corporate tax rate by 2.5 percent this year and another 2.5 percent next year to achieve the stated 25 percent rate. Last year Jaitley detailed the four key corporate tax benefits that will be eliminated starting April 1, 2017 and Kanabar expects him to stick to that roadmap. He’s also rooting for higher personal income tax exemption limits and lower tax rates.
Indirect tax expert Badri Narayanan, partner at Lakshmikumaran Sridharan, is less convinced that the finance minister has fiscal room to cut taxes. Mostly due to GST-led uncertainty. He’s in fact expecting an increase in the service and excise tax rates.
The theory is that a manufacturer today pays 12.5 percent excise and 12.5 percent VAT, that’s 25 percent. And a service provider only pays 15 percent. So he’s not paying an equal amount of tax as compared to everybody else. So the push has always been to bring it up to that level and also so that the jump from that to the GST 18 percent rate is not that painful. But having said that I would really recommend, if possible, to not increase the rate and wait for GST to come. Because the GST rate of 18 percent is with input credit, which is not available right now. But I do expect some increase.Badri Narayanan, Partner, Lakshmikumaran Sridharan
While excise duty and service tax collections are what boosted tax revenue in the April – December 2017, customs duty collections disappointed. Narayanan says that and the Make In India effort may prompt some reduction in duties, or at least some relief for specific sectors.