Economic Slowdown Punctures Govt's Targets of Tax Collection as PSU Profits Dive
When the economy is in a deep and ongoing slowdown and the government has already offered a massive sop to India Inc in the form of a steep cut in the headline corporate tax rate, expecting targets set in the beginning of the fiscal to be met is like day dreaming.
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The Indian economy continues to be in serious trouble and repeated government assertions of meeting ambitious targets of tax collections are beginning to sound hollow. A robust growth in tax collections is key to government finances since it will ultimately help the government meet yet another ambitious target — that of maintaining its fiscal deficit to 3.3% of GDP. Ambition is a good thing as long it is peppered with a dose of pragmatism. When the economy is in a deep and ongoing slowdown and the government has already offered a massive sop to India Inc in the form of a steep cut in the headline corporate tax rate, expecting targets set in the beginning of the fiscal to be met is like day dreaming.
In an article, the Business Standard quoted unnamed income tax officials saying they are seeking a lowering of the total direct tax collection target for this fiscal by Rs 1 lakh crore. Direct tax comprises corporation tax (tax on corporate profits) and personal income tax. Corporation tax collection grew by just 0.5% between April and October against the year’s expansion target of around 15%. Personal IT collections were up by 5% till October.
These actual compare poorly with targets set in the Budget for 2019-20, where the corporate tax collection target is a growth of 14.2% (over revised estimates of FY19) to Rs 7.66 lakh crore and personal income tax collection is expected to grow by 7.6% to Rs 5.69 lakh crore. Collections from GST were projected to rise by 3% to Rs 6.63 lakh crore and as per the Budget targets, Centre’s total tax revenue was expected to increase by 11.4% to a little over Rs 16.49 lakh crore.
Such a heady growth in tax collections was ambitious to begin with. But now, seven months into the fiscal year, it appears highly unlikely that these targets will be met because of a deepening economic slowdown. And continued damning economic data from different sources makes these targets even more difficult to achieve in the remaining part of the fiscal year. According to the latest estimate put out by State Bank of India, GDP growth in the July-September quarter (Q2) was at just 4.2%, a record low. Already, several external agencies including Moody’s have also drastically slashed the growth forecast for the Indian economy.
A significant decline in GDP growth itself is a precursor to a fall in tax collections. Then, the latest data for industrial production has provided a bigger shock: it suggests factory activity fell to a seven year low of -4.3% in September. With personal consumption falling across rural and urban markets, industrial activity at multi-year lows and GDP growth also languishing at a record low, how can the lofty tax collection targets set out in the Budget be met?
Girish Vanvari, founder of Transaction Square and former head of Direct Tax at KPMG, says the biggest contributor to direct tax collections are public sector units and large PSU banks. And there has been significant erosion in their profit margins this fiscal because of the ongoing bank NPA cleanup; refinery margins are down and together with other sectors being in the grip of a slowdown, corporate profits are much lesser.
“Total direct tax collections this fiscal are likely to be lower by about 20% compared to Budget targets because of economic slowdown. Collections could worsen in the second half because turnaround is still some time away,” Vanvari adds.
Already, thanks to its decision to lower the headline tax rate on profits of the corporate sector, the government has acknowledged a nearly Rs 1.45 lakh crore hit on corporate tax collections this year. Then, as the growth in personal income tax also fails to keep up with the annual target, the shortfall in total direct tax earnings versus the target is also expected to be significant.
Bloomberg, in an article, quotes data from the Comptroller General Accounts (CGA) to show that total direct tax collections grew by just 2.7% between April and October this year. The government collected Rs 5.2 lakh crore in direct taxes during the first seven months of the fiscal against Rs 5.02 lakh crore in the same period last year. But since the annual target for FY20 is a nearly Rs 1.4 lakh crore total increase in direct tax collections by March next year, it is no wonder that officials tasked with collecting and monitoring tax growth are now convinced this ambitious target will not be met.
An analysis by SBI Mutual Fund has shown that the gross tax revenue has grown by a mere 1.5% in the first half of the fiscal year (April-September) against a required growth rate of over 18%. Not just direct tax collections, even GST collections have been below par, at -3% against needed increase of over 13% for Budget targets to be met. “Overall, we expect central government revenue shortfall of nearly Rs 1.5 trillion (Rs 1.5 lakh crore) in 2019-20, owing to weakness in both direct and indirect tax collections,” the SBI MF analysts say.
No wonder then that tax officials are seeking a downward revision of direct tax collection target by Rs 1 lakh crore.
(The author is a senior journalist. Views expressed are personal.)
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